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Weekend Stock Market Analysis

(6/26/04)

Expect a volatile week next week as there is a Federal Reserve Policy meeting and also it will be the end  and the 2nd Quarter for the Institutional Money.   The Nasdaq was much stronger last week versus the Dow and S&P 500 mainly due to the strength in the Semiconductors.

The Semiconductor Holders (SMH) got rather oversold just over a week ago as the %K Line in association with the Slow Stochastics dropped way below 20 (point A) and rallied this week.  The SMH's stalled out near their 50 Day EMA (blue line) on Thursday and Friday.  The key short term level to watch next week is around 36.75 (point B).  If the SMH's can hold support around 36.75 and rise above their 50 Day EMA then look for the next area of significant upside resistance near 38.40 which is where their downward sloping trend line (solid brown line) and 100 Day EMA (green line) reside at.  For me to become bullish on the Semiconductor sector I still think the SMH's must clear the high made in late May near 39 (point C).   Meanwhile if the SMH's fail to hold support next week near 36.75 look for them to rollover quickly and drop back to the 35.75 level (point D).

Depending on what the Semiconductors do will likely influence the technology laden Nasdaq.  The Nasdaq has now broken above its downward sloping trend line (solid brown line).  If the Semiconductors can continue to rally look for the Nasdaq to either rise up to the 2055 (point E) or 2080 (point F) levels.  Meanwhile if the Semiconductors come under some selling pressure and the Nasdaq reverses look for initial support around 1980 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) reside at.  If the Nasdaq drops below 1980 the next key support area would be around 1960 (point G) which is where it has held support three separate times during the month of June.  

The S&P 500 which tried to break out of its prior 10 day trading range (TR) reversed strongly to the downside on Friday probably in response to weakness in the Banking sector.  If additional selling pressure occurs next week in the S&P 500 look for support in the 1118 to 1123 range which coincides with its 50 Day EMA (blue line) and 100 Day EMA (green line).  Meanwhile if the S&P 500 reverses and can break above the 1145 level then look for a rise back to the March high near 1160 (point H).

As mentioned above the Banking sector (BKX) is heavily weighted in the S&P 500 and depending on how the Banks act next week will likely have a significant impact on the S&P 500.  The Federal Reserve meeting will also come into play next week as well and it will be interesting to see how the BKX reacts to any rate increase.  There are two possible scenario's for the BKX next week as it has been in a trading range (TR) over the past two weeks.  Either the BKX will break above the 98.25 area which will have a positive impact on the S&P 500 or it will drop below 96 and retest its 200 Day EMA (purple line) around 95 which will have a negative impact on the S&P 500.  Like I said above the outcome of the Federal Reserve meeting may allow for the BKX to breakout of its trading range strongly in one direction or the other.   

Another thing I have been watching is the Volatility Index (VIX) of the S&P 500 and have been monitoring two trends.  First during the past 6 months when the VIX has dropped to 14 or below this has eventually led to selling pressure in the S&P 500 (points I).  This past week the VIX dropped below 14 on Wednesday (point J).

The second thing that I'm seeing is the divergence developing between the VIX and its %K Line in association with the Slow Stochastics.  In April we saw the same type of pattern develop in which the VIX trended lower (point K) as the %K Line began to trend higher (point L) which eventually led to a strong upward move in the VIX  and a strong downward move in the S&P 500 (points I to M).  Thus is the VIX getting close to making a significant upward moving like occurred in late April which could lead to additional selling pressure in the S&P 500? 

The Dow tried to break out of its 10 day trading range (TR) this week but also reversed strongly to the downside on Friday.  If additional selling pressure occurs in the Dow next week the key support area to watch is in the 10260 to 10300 range which coincides with its 100 Day EMA (green line) and 50 Day EMA (blue line).  If the Dow drops below 10260 that could spell trouble with an eventual retest of its 200 Day EMA (purple line) near 10080.  Meanwhile if the Dow reverses itself and can break above 10480 then I would look for upside resistance at its April high near 10575 (point N).

As mentioned in the beginning next week is going to be very interesting and may get rather volatile especially from Wednesday on due to the Federal Reserve meeting and the end of the 2nd Quarter for the Institutional Money.    

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