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Weekend Stock Market Analysis
(7/31/04)
Major Averages We finally got a
bounce form oversold conditions in the major averages this past week. The
Dow which held key support above the May low near 9850 has rallied back above
its 200 Day EMA (purple line). In the near term look for potential upside
resistance to occur next week just above 10200 which is where its 50 Day EMA
(blue line) and 100 Day EMA (green line) reside at. Meanwhile if the Dow stalls out at or below the
10200 next week and begins to rollover the key support area to watch remains at
its May
low near 9850. One other thing to note since the first
of the year is that when the Dow has become oversold and the %K Line in
association with the Slow Stochastics has dropped well below 20 (points A) that
the %K Line has typically risen well above 80 (points B) as the Dow rallied from
oversold conditions. If this same pattern repeats itself then the
Dow may still have some more upside potential in the near term. 
The Nasdaq also bounced from
oversold conditions last week and if it continues higher look for upside
resistance to occur in the 1930 to 1940 range which coincides with its 200 Day
EMA (purple line) and 50 Day EMA (blue line). Meanwhile if the Nasdaq
stalls out near its current level next week and begins to rollover again look
for short term support around 1830 (point C). 
The S&P 500 held support this
week near its May low and has rallied back above its 200 Day EMA. If the
S&P 500 continues higher look for possible upside resistance to develop near
1113 which is where its 50 Day EMA and 100 Day EMA have converged at.
Meanwhile if the S&P 500 stalls out near its current level and reverses to
the downside look for support at its May low near 1077. 
Major Sectors One
sector I will be watching closely next week is the Banks (BKX) which look like
they may be getting close to making a substantial move in one direction or the
other as their downward and upward sloping trend lines (solid black line) are
converging. Depending in which direction this move occurs will likely have
a substantial impact on the S&P 500 which is heavily weighted by the
Banks. If the BKX breaks above 96 look for a quick upward move to its June
high just above 98 (point D) which would have a positive affect on the S&P
500. Meanwhile if the BKX breaks below 93.50 look for a quick drop back to
its May low near 91 (point E) which would have a negative affect on the S&P
500. 
The Semiconductor Holders (SMH) have
also begun to bounce from oversold conditions which has been a typical trend
since January after they have dropped an average of 6 to 8 points (F to
G). In each case after dropping an average of 6 to 8 points while becoming
oversold the SMH's then bounced and rallied an average of 4 to 5 points (points
G to F) over the next few weeks. If this same trend continues then the
SMH's may still have some upside potential with a possible rally back to the 35
level which is at their 50 Day EMA (blue line) as they bottomed out last week
just below 31. 
The Gold and Silver sector (XAU)
appears to be developing a trading range on a weekly basis with a key support
area near 76 while a major resistance area resides around 92. The next
major move in the XAU will likely occur as one of these levels is
breached. If the XAU breaks above 92 then this could eventually lead to a
rally back to around 104. However if the XAU breaks below 76 then this
could lead to a quick drop back to the upper 60's which is at its longer term
61.8% Retracement Level calculated from the 2000 low to the early 2004 high.. 
Contrarian Indicators As
mentioned last weekend despite the weakness in the market since early in the
year the Bullish-Bearish Indicator hasn't shown any panic among the Investment
Advisors as there hasn't been a substantial drop in the % of Bullish Advisors or
a substantial increase in the % of Bearish Advisors. In the past when the
% of Bearish Investment Advisors has been equal to or greater than the % of
Bullish Investment Advisors significant market reversals have occurred (points
H). 
Meanwhile the 5 Day Running
Average of the Put to Call Ratio has been trending downward as well and during
the past few years when it has dropped to around .60 (points I) this has been a
signal of a nearing top followed by either a sideways trading market or an
increase in selling pressure. Thus I will be watching the 5 Day Running
Average of the Put to Call Ratio closely over the next week or two for any drop
back to the .60 area. 
Some of you have asked me what are
the best types of stocks to short. Generally I look for those stocks that
are over $20 and trade over a million shares on a daily basis. Also I look
for those stocks which have sold off hard and then bounced back to either a
significant retracement level or moving average and then begin to rollover
again. A good example is provided by NTES which sold off hard
from mid April through early May and then rallied back to its 61.8% Retracement
Level near $49 (point J) but then stalled out. A short signal was then
generated when the %K Line in association with the Slow Stochastics dropped
below 80 (point K). Over the next 5 weeks NTES then dropped from the upper
$40's to the lower $30s. 
Remember the best time to short
stocks is when the market is in a downtrend. If you try and short stocks
when the market is in an up trend that will likely be a losing proposition in most
cases. Meanwhile when you are looking for stocks to
focus on to the long side look for those that are developing a favorable chart
pattern. A recent example of a stock which has formed the right side of a
2 year Cup is TXI. Over the next few weeks I will be watching TXI to see
if it can now develop a constructive Handle to go along with its Cup. 
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