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Weekend Stock Market Analysis

(11/26/05)

We have had 5 solid up weeks since the mid October low and all three major averages are now on the positive side for the year.  In the near term the market is overbought and investors have become rather complacent as the Volatility Index (VIX) is near its July low.

As mentioned last weekend I still believe we could see a brief pullback develop similar to what occurred last June after the VIX dropped sharply (point A to B) which was followed by a brief 2 week pullback in the S&P 500 (points C to D) before it resumed its upward trend (points D to E).  

As far as the major averages the Dow has rallied around 800 points since the mid October bottom but may encounter some resistance at its early March high near 11000 (point F).  If the Dow does stall out near 11000 and eventually undergoes a brief pullback I would look for support at its previous resistance area near 10700.

 

Meanwhile if the Dow does break strongly above the 11000 level then its next area of upside resistance would be around 11400 which is where it stalled out at in 2001 (point G).

The Nasdaq has rallied over 200 points since the mid October low.  If the Nasdaq undergoes a brief pullback I would look for support either at its early August high near 2220 (point H) or at its rising 20 Day EMA (blue line) just above 2190.

 

Meanwhile if the Nasdaq does continue higher through the end of the year into the early part of 2006 its next area of upside resistance may occur around 2330 (point I) which is where the bounce from oversold conditions stalled out at in May of 2001.

The S&P 500 has risen around 100 points since mid October and if a brief pullback develops look for support either at its previous resistance area near 1245 or at its rising 20 Day EMA (blue line) near 1235. 

In the longer term the S&P 500 has now risen just above a key resistance area near 1254 which corresponds to its 61.8% Retracement Level.  If the S&P 500 continues higher through the end of the year into the early part of 2006 its next level of upside resistance may occur around 1315 (point J) which is where the bounce from oversold conditions stalled out at in May of 2001.  

Meanwhile although I tend to focus on the Dow, Nasdaq and S&P 500 when looking at the overall market the Russell 2000 looks rather interesting.  As you can see the Russell 2000 is exhibiting a similar "Double Bottom" pattern like occurred earlier in the year and back in 2004.  In the previous two cases after completing the "Double Bottom" pattern the Russell 2000 then pulled back for a few weeks and developed a Handle (H) before moving higher (points K to L).  Thus if we see a similar pattern occur again I would expect the Russell 2000 to pullback for a few weeks before eventually moving higher as we end the year.    

Finally if the major averages can continue higher through the end of the year and into the early part of 2006 continue to focus on those stocks which are breaking out of a favorable chart pattern.

Last week AKAM a stock in our watch list broke strongly out of its 4 week Handle (H) after forming a Cup.

For the year our Long Term Investing Strategy is up 31.4% while our Short Term Investing Strategy is up 62%.

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