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Weekend Stock Market Analysis


The action in the Nasdaq over the next two weeks is going to give  us a clue as to whether we are nearing a top or whether the rally from the April lows is going to continue.  The Nasdaq once again has run into strong upside resistance around 2100 which is the fourth time since last February.  If the Nasdaq is able to break solidly above the 2100 level then I would expect it to rally up to its previous high near 2190 that occurred early January.  Meanwhile if the Nasdaq stalls out near 2100 and is unable to break through this resistance area then look for a possible sell off with the Nasdaq dropping back to the 2040 to 2060 range which corresponds to its 20 Day EMA (blue line) and 50 Day EMA (green line).   

As mentioned in previous discussions there are two sectors (Biotechs and Semiconductors) that I'm watching which could give the Nasdaq a boost either to the upside or downside.  First looking at the Biotech (BTK) sector it appears the BTK is attempting to break out of its longer term Symmetrical Triangle pattern as its upward and downward sloping trend lines (brown lines) have converged.  If the BTK can break above 560 then I would expect it to rise up to its longer term 61.8% Retracement Level (calculated from the 2000 high to the 2002 low) near 600 (point A) which should have a positive impact on the Nasdaq.  Meanwhile if the BTK fails to get above 560 and eventually drops below its longer term upward sloping trend line near 500 then that would likely have a negative affect on the Nasdaq in the longer term.

The second sector to watch is the Semiconductors as the Semiconductor Holders (SMH) are still exhibiting a potential Double Bottom pattern and are beginning to develop a small two Week Handle (H).  Now in order for the SMH"s to be constructive they should remain at or above their 40 Weekly EMA (green line) near 33 while developing a Handle.  If the SMH's can hold support above 33 and then eventually break above the 35 level then I would look for a rally up to the 37 to 39 range which corresponds to their longer term 50% and 61.8% Retracement Levels (calculated from the January 2004 high to the September 2004 low).  If this scenario occurs then the Nasdaq would likely rally back to its previous early January 2005 high near 2190.

Meanwhile if the SMH's fail to hold support near 33 while developing a Handle then I would expect them to eventually retest their prior April low near 30 which would likely have a negative affect on the Nasdaq in the longer term.  Thus it will be interesting to see what transpires in the Biotechs and the Semiconductors over the next week or two. 

As for the other two major averages the Dow broke out of its three week trading range (TR) on Friday however it does have an upside resistance area just below 10700 (point B) which corresponds to its 23.6% Resistance Level (calculated from the October 2004 low to the early March high).  If the Dow can break above 10700 then it looks like the next area of resistance would be around 10850 which is where it stalled out at in late December (point C).  Meanwhile if the Dow stalls out near 10700 and comes under some selling pressure I would look for initial support at its 38.2% Retracement Level near 10500.


As I have mentioned in the past the price of Crude Oil has had an impact on the Dow over the past year or so.  Right now the price of Crude Oil is approaching its previous high made in early April near $60.  If the price of Crude Oil breaks strongly above the $60 level in the weeks ahead then we could see a repeat of what occurred from mid February through March in which the price of Crude Oil rose around $10 (points D to E).  If this happened then we could see the price of Crude Oil reach the $70 level which could lead to a potential sell off in the Dow similar to what occurred during the month of March (points F to G).  However if the price of Crude Oil stalled out near $60 instead and eventually came under some selling pressure then that might act as a positive for the Dow.  Thus it will be very interesting to watch the price of Crude Oil over the next few weeks.  

As far as the S&P 500 it has continued higher and is only about 10 points away from its early March high near 1229.  If the S&P 500 does continue higher in the near term I would look for resistance to occur near the 1229 level.   

One thing that still bothers me is the extremely low reading in the Volatility Index (VIX) as option investors have become very complacent over the past few weeks.  The VIX made a new 52 week intra day low on Friday as it dropped below 11 (point H).  As mentioned before the last three times the VIX has dropped well below 12 (points I) this has eventually lead to some type of sell off within a week or two that lasted from 1 to 3 weeks (points J to K) with the S&P 500 dropping an average of 50 to 60 points.  Thus although the S&P 500 may still rise back to around the 1229 level in the near term I think we have to be on the lookout for a potential sell off within a week or two if history repeats itself.

Finally since late April we have seen several stocks breakout of a favorable chart pattern and move higher.  Those who have read this column on a weekly basis over the past few months were told to watch GILD in the Biotech sector as it was exhibiting a Cup and Handle pattern back in May.  GILD broke out of its Handle (H) in mid May and has risen over 10% since then.  

Finally our 50% Off Introductory Special for New Members will expire at the end of this month.  Since going online in late 1999 we have been providing a list of stocks to buy which focuses on stocks that have decent Sales and Earnings Growth that are exhibiting a favorable chart pattern such as the "Cup and Handles", "Double Bottoms" and "Flat Bases".

Our Performance Statistics versus the Major Averages are shown below going back to 2000.
(2005 Results are through the month of May)

Year 2005 2004 2003 2002 2001 2000
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Dow -2.2% +3.1% +25.3% -16.7% -7.1% -6.2%
Nasdaq -4.6% +8.6% +50.0% -31.5% -21.0% -39.2%
S&P 500 -1.1% +9.0% +26.4% -23.3% -13.0% -10.1%

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