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Weekend Stock Market Analysis

(5/1/04)

In my opinion next week is a crucial week for the market as the major averages are approaching critical longer term support areas.   The Dow has a critical support area in the 9950 to 10000 range which corresponds with its late March low (point A), 200 Day EMA (blue line) and longer term 23.6% Retracement Level (calculated from the October 2002 low to the February 2004 high).  In order for the Dow to be constructive it needs to hold support near 10000.  If the Dow fails to hold support near 10000 then look for a possible drop back to its longer term 38.2% Retracement Level near 9400 (point B) in the weeks ahead.

The Nasdaq is nearing a critical support area around the 1900 level which corresponds to its late March low (point C), 200 Day EMA (blue line) and longer term 23.6% Retracement Level (calculated from the October 2002 low to the January 204 high).  It will be critical for the Nasdaq to hold support next week near the 1900 area.  If the Nasdaq fails to hold support near 1900 then it could undergo a much larger drop and eventually fall back to its longer term 38.2% Retracement Level near 1750 (point D). 

Meanwhile the S&P 500 has a critical support area in the 1075-1090 range which corresponds to its late March low (point E), 200 Day EMA (blue line) and longer term 23.6% Retracement Level (calculated from the October 2002 low to the March 2004 high).   Thus for the S&P 500 to remain constructive it really needs to hold support in the 1075-1090 range next week.  If the S&P 500 fails to hold support at these levels then look for a larger drop back to its longer term 38.2% Retracement Level near 1015 (point F) in the weeks ahead.

Meanwhile a few sectors to keep an eye on are the Banks (BKX) and Semiconductor Holders (SMH).  The BKX has a critical support area in the 93 to 94.50 area which coincides with its longer term 23.6% Retracement Level (calculated from the October 2002 low to the March 2004 high) and 200 Day EMA (blue line).  If the BKX fails to hold support in the 93 to 94.50 range and breaks below 93 it could eventually drop back to its longer term 38.2% Retracement Level around 87 (point G) which would cause additional selling pressure in the S&P 500 as well.  Thus it will be important for the BKX to hold support next week at or above the 93 level.  

Meanwhile the Semiconductor Holders (SMH) have been in a steady downtrend since peaking in early January which has had a significant impact on the technology laden Nasdaq.  The SMH's have broken well below their 200 Day EMA (blue line) and now are approaching their longer term 38.2% Retracement Level near 35.  The Slow Stochastics indicate the SMH's are now becoming very oversold as the %K line (point H) has dropped well below 20.  Over the past several months when the %K line has dropped below 20 (points I) this has led to some type of rally in the SMH's with varying degrees of magnitude.  Thus it's possible the SMH's are getting close to a possible reversal. 

Meanwhile the Volatility Index (VIX) gave us a fairly strong signal last weekend that the market was due for some more selling pressure this week as investors had become to complacent.  Notice that the VIX dropped just below the 14 level (point J) which in the previous two occasions (points K) led to selling pressure in the S&P 500 as well.  What we would like to see happen next week is for the VIX to rise substantially above its 10 Day Moving Average (blue line) which would signal widespread fear among investors that could lead to an upside reversal.  Notice in the past when the VIX has risen substantially above its 10 Day Moving Average (points L) this has led to an upside reversal.  

I know the market hasn't been acting well but watch these support levels next week in the major averages and see if they can hold:  Dow (near 10000), Nasdaq (around 1900)  and S&P 500 (1075-1090).  If the major averages can hold support near these  levels then this would be a positive development which could eventually lead to a rally.

Meanwhile when the market is correcting you should really be paying close attention to those stocks which are holding up well as those may be the ones to perform the best once the market reverses to the upside.  An example of a stock which has been going up and forming the right side of a 7 month Cup as the market has been going down is SFCC.  Now what we would like to see is for SFCC to begin developing a Handle over the next few weeks.   

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