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Weekend Stock Market Analysis

(3/19/05)

The rising price of Crude Oil finally took its toll on the Dow as they have been trending in opposite directions over the past year.  Generally when the price of Crude Oil has risen (points A to B) the Dow has come under selling pressure (points C to D) and when the price of Crude Oil has dropped (points B to A) the Dow has risen (points D to C).  If this trend continues over the next several weeks then the performance of the Dow will likely depend on what the price of Crude Oil does.

As far as the major averages the Dow has dropped below its 50 Day EMA (blue line) around 10700 but still remains above its 200 Day EMA (purple line) near 10440.  In the near term the Dow has become somewhat oversold on a daily basis and we may see a brief oversold bounce occur sometime next week.  If this bounce does occur I would look for resistance to occur in the 10700 (50 Day EMA) to 10750 range (20 Day EMA).  Meanwhile if a bounce doesn't develop and the Dow continues lower its next support area would be in the 10440 to 10375 range which corresponds to its 200 Day EMA and the low made in late January (point E). 

The Nasdaq broke below its 200 Day EMA (purple line) and previous January low near 2010 last week and really needs to hold support near 2000.  Just like the Dow the Nasdaq has become somewhat oversold in the near term and if a bounce occurs I would look for resistance to occur at its 20 Day EMA (blue line) just above 2040.  Meanwhile if the Nasdaq continues lower instead we have to look at Retracement Levels (calculated from the August low to the early January high) to determine where the next levels of downside support may exist.  The 50% Retracement Level is around 1970 (point F) and the 61.8% Retracement Level is at 1920 (point G) so those are two possible levels the Nasdaq could find support at if it continues lower.  

As far as the S&P 500 it has broken below its 50 Day EMA (green line) near 1197 but still remains above its 200 Day EMA (purple line) near 1160.  If a brief bounce develops from oversold conditions look for possible resistance to occur near 1200 which is at the S&P 500's 20 Day EMA (blue line).  Meanwhile if the S&P 500 doesn't bounce and continues lower its next level of support would be at its 200 Day EMA (purple line) near 1160 which also corresponds to its longer term upward sloping trend line (black line) originating from the August low. 

As I have talked about before the Banks are a sector to watch as they will have an impact on the S&P 500.   Despite the S&P 500 making new highs in early March the Banking Index (BKX) is exhibiting a potentially bearish looking pattern as it appears to be developing a downward trending channel (brown lines) after it peaked in late December.  If the BKX continues stuck in this downward trending channel then this could pose problems for the S&P 500 in the longer term.

Meanwhile although I haven't talked about the market psychology for a while this week I thought I would comment on the Bullish-Bearish Investment Advisor Sentiment.  The chart below compares the S&P 500 to the % Difference between the Bullish and Bearish Investment Advisors going back to the late 1990's.  As you can see major market bottoms have occurred when the % Difference between the two has dropped well below zero which indicates the % of Bullish Investment Advisors is less than the % of Bearish Investment Advisors.  Since 1997 there have been four times (points H) when the % of Bullish Investment Advisors has been significantly lower than the % of Bearish Investment Advisors such that the % difference has reached -10% or lower.  The last time we saw the % difference drop to -10% was in October of 2002 which preceded the strong rally that developed in the S&P 500.  From the time the S&P 500 bottomed in late 2002 near 790 to when it reached around 1230 in early March of this year it had gained over 50% which is quite a run.    

Thus although it doesn't happen often when the % of Bullish Investment Advisors is significantly less than the % of Bearish Investment Advisors there is a very good chance the market is getting close to a major bottom which will be followed by a significant rally. 

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