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  Weekend Stock Market Analysis

(11/13/04)

The major averages continue to rally due to weakness in the price of Crude Oil.  As I have mentioned several times the price of Crude Oil and the Dow have been going in opposite directions during the past year.  When the price of Crude Oil has risen (points A to B) the Dow drops (points C to D) and when the price of Crude Oil has fallen (points B to A) the Dow has risen (points D to C).  

The question at this point is has the price of Crude Oil made a significant top or is the recent action just another pullback before it eventually tries to rally to a new 52 week high in the weeks ahead?    

One thing I have been noticing over the past 5 weeks is that the Oil Index (XOI) which tracks the Oil related stocks has been holding support near its 10 Weekly EMA (blue line) while developing a trading range (TR) between 685 and 730.  Eventually the XOI is going to break out of this trading range which may have an impact on the market.  If the XOI breaks above 730 this could lead to higher Oil prices which may have a negative affect on the major averages.  Meanwhile if the XOI breaks below the 685 level this could have a positive impact on the major averages.  

Despite the major averages rallying strongly over the past 3 weeks one thing that is a little bothersome is the rapid drop in the Volatility Index (VIX) which has dropped back to its early October low (point E) this past week.  This could mean that we may see a pullback develop in the major averages before much longer so this is something to be aware of in the days ahead. 

As far as the major averages the Dow has finally broken its longer term trend of making lower highs as it has risen well above its downward sloping trend line (solid black line) originating from the February high.  It looks like the Dow will probably rally back to its February high near 10750 (point F) at some point before the end of the year.  However the question is will we first see a pullback develop before this happens or will the Dow just continue to rally upward through the end of the month.  If a pullback does develop I would look for the first area of support at the Dow's rising 10 Day EMA (blue line) which is currently approaching the 10350 area. 

The Nasdaq has also rallied well above its downward sloping trend line (solid black line) originating from its January high.  The Nasdaq will probably rally back to its January high near 2155 (point G) before the end of the year but we could see a pullback occur before that happens.  If a pullback does develop in the Nasdaq the first area of support would be at its rising 10 Day EMA (blue line) which is approaching the 2040 area.

As for the S&P 500 it has broken above a key longer term upside resistance area near 1160 which coincided with its 50% Extension Level (calculated from the early 2000 high to the October 2002 low).  If the S&P 500 continues higher through the end of the year its next major upside resistance area is around 1255 which is at its 61.8% Extension Level (point H).

Meanwhile in the near term if we do see a pullback develop in the S&P 500 I would look for initial support at its rising 10 Day EMA (blue line) near 1160.

Finally when looking for stocks to invest in focus on those stocks which have developed a "Cup and Handle" pattern.  DRIV is a recent example of a stock which broke out of a small 3 week Handle (H) after forming a 5 month Cup.

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