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Weekend Stock Market Analysis

(11/19/05)

The major averages have now had four solid up weeks in a row since the mid October bottom.  However investors are quickly become complacent as the Volatility Index (VXO) has dropped considerably since mid October (points A to B).  In the past when the VXO has dropped strongly (points C to D) we have seen some type of correction/pullback occur (points E to F).  Since we are in a seasonally strong period for the market I believe that any pullback that does develop will only last a short period of time (a few weeks) which will then be followed by more upside as we end the year.  Thus we may see a similar pattern like occurred last June when the S&P 500 pulled back for a few weeks (points G top H) but then rallied strongly in the month of July (points H to I).          

If a brief pullback does develop the Dow should find support at or above its rising 20 Day EMA (blue line) just above 10570. 

 

As for the Nasdaq it should find support at or above its rising 20 Day EMA (blue line) near 2170 if a pullback develops.

Meanwhile the S&P 500 should find support at or above its rising 20 Day EMA near 1224 if a pullback does occur.

As mentioned above if we do see a brief pullback develop I still think the major averages will trend higher as we end the year especially if the price of Crude Oil continues to drop.  

If we look at a longer term chart of the Dow the next area of upside resistance would be at the March high near 11000 (point J).  If the Dow were able to break above 11000 then it could eventually rally up to where it stalled out in 2001 near 11400 (point K). 

As for the Nasdaq it's currently trying to break a previous resistance area just above 2200 (point L).  If the Nasdaq is able to trend higher through the end of the year its next area of upside resistance appears to be around 2325 which is where it stalled out at in May of 2001 (point M).

Meanwhile the S&P 500 still has a significant longer term upside resistance area near 1254 (point N) which corresponds to its 61.8% Retracement Level (calculated from the early 2000 high to the October 2002 low). 

  

If the S&P 500 were able to break above the 1254 level then it appears its next area of upside resistance would be where it stalled out in May of 2001 just above 1300 (point O).

If the major averages continue to rally through the end of the year focus on those stocks which are breaking out of a favorable chart pattern.  During the past 9 months TESOF has exhibited two favorable chart patterns.  TESOF first developed a Cup and Handle pattern from March through August and then broke out of its Handle (H) in late August and rose from $13 to $17.  Then over the next 9 weeks TESOF traded nearly sideways and developed a Flat Base before breaking out again this past week.

Quite often you will see this type of pattern occur as a stock will initially break out of a Cup and Handle pattern and rally for a period of time but then stall out and develop a Flat Base before eventually resuming its up trend.  Another example of this was shown by HP as it developed a Double Bottom pattern with a Handle (H) in 2004 and then rallied from November of 2004 through February of 2005 (points P to Q).  Then HP stalled out and traded nearly sideways from March through May and developed a 3 month Flat Base before rallying strongly again from June through July (points S to T).  

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