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Weekend Stock Market Analysis
(3/11/06)
During the past two months the Nasdaq and S&P 500 have been
stuck in a trading range (TR). The Nasdaq has been holding support around
2233 while encountering resistance at the 2333 level. Eventually the Nasdaq will
break out of this trading range and likely make a substantial move in one
direction or the other. If the Nasdaq were to break to the downside out of
its trading range then I would expect initial support to occur at its 40 Weekly
EMA (blue line) near 2195. However if the Nasdaq were to break below its
40 Weekly EMA then this could lead to a larger drop back to its longer term
upward sloping trend line (brown line) near 2100. Meanwhile if the Nasdaq
were to break to the upside out of its trading range then we could see a decent
upward move with the Nasdaq rising above the 2400 level. 
One thing that
could determine which direction the
Nasdaq may breakout of its trading range is how the Semiconductor
sector performs in the weeks ahead. The Semiconductor Index (SOX) which had developed a
constructive Handle (H) the previous five weeks after forming a 2 year Cup broke
below the bottom of its Handle this week. The thing to watch now is if the
SOX can hold support at or above its
40 Weekly EMA (blue line) near 480. If the SOX were to break below the 480
level then this could lead to more substantial drop which would likely have an
adverse affect on the Nasdaq as well. 
Meanwhile the S&P 500 also has
been stuck in a trading range (TR) the past two months and has been holding
support near 1255 while encountering resistance around 1295. Eventually
the S&P 500 will break out of its trading range and probably make a
substantial move in one direction or the other as well. If the S&P 500
were to drop break below the 1255 area then look for initial support at its 40
Weekly EMA near 1240. However if the S&P 500 were to fall below the
1240 level then this could lead to a larger drop back to its longer term upward
sloping trend line (brown line) near 1210. 
On the other hand if the S&P 500 were to
break out of its trading range to the upside then this could lead to a
substantial upward move possibly back to the 1360 level (point A) which is at
its longer term 76.4% Retracement Level. 
As for the Dow it has been acting
the strongest of the three major averages of late possibly in response to the
weakness in the price of Crude Oil. As we have seen in the past there has
been an inverse relationship between the price of Crude Oil and the Dow.
When the price of Crude Oil has dropped (points B to C) the Dow has generally
risen (points D to E) and when the price of crude Oil has risen (points C to D)
the Dow has come under selling pressure (points E to D). During the past
week the price of Crude Oil began to drop again (points B to F) which appears to
have helped the
Dow rally (points D to G). Meanwhile since last November the
price of Crude Oil has been holding support near the 58 level. If at some
point the price of Crude Oil were to drop below the 58 level then it appears
this would have a positive impact on the Dow in the longer
term. 
Finally although the major averages
especially the Nasdaq and S&P 500 have been stuck in a trading range for the
last few months it's important to have a list of stocks ready to invest in if
they eventually do breakout to the upside in the weeks ahead. For
example ABAX from our Top 100 List has formed the right side of a 2 year Cup as
it has stalled out near its previous high made in April of 2004. ABAX now
needs to develop a constructive Handle in the weeks ahead to complete a
favorable looking Cup and Handle pattern. 
Keep
in mind it's not uncommon for a stock to stall out near a previous high or
resistance level when developing a Cup and Handle pattern. Take HP
for example which formed a 3 year Cup from early 2002 through the early part of
2005 and stalled out at a previous longer term resistance level around the 42
level (point H). Meanwhile after forming the right side of a Cup HP then
traded sideways for several weeks while developing a Handle to complete a longer
term Cup and Handle pattern. Then in the middle part of 2005 HP broke out
of its Handle and made a substantial move higher through the early part of 2006. 
In
2005 our Long Term Investing Strategy finished up 31% while
our Short Term Investing Strategy ended up 64%.
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