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  Weekend Stock Market Analysis

(10/16/04)

Over the past year the market has been very choppy as we have seen significant moves in both directions while being in a persistent downtrend.  So far each significant upside turn in the market has been signaled fairly well by following the Volatility Indexes which track the Nasdaq 100 (VXN) and S&P 500 (VIX).  

As shown below when the Nasdaq has sold off and begun to near a bottom the VXN has risen into the upper 20's the past three times (points A).  Currently the VXN has only risen into the lower 20's (point B) while the Nasdaq has come under some selling pressure during the past few weeks.

Meanwhile looking at the VIX during the past year shows that it has risen to 20 or above (points C) when the S&P 500 has neared a significant bottom.  Currently the VIX has only risen into the mid teens (point D) as the S&P 500 has come under some selling pressure over the past few weeks.

Although the major averages did try to bounce on Friday so far neither the VXN or VIX have risen to levels yet that would signal a major bottom is in place based on previous readings.  

Meanwhile one thing that continues to pressure the market is the rising price of Crude Oil.  As I have pointed out before during the past several months the price of Crude Oil and the Dow have been going in opposite directions.  When the price of Crude Oil rises the Dow drops (points E to F) and when the price of Crude Oil drops the Dow rises (points F to E).   Thus it appears as long as the price of Crude Oil continues to rise this will have an adverse affect on the market.

However I would also like to point out that the price of Crude Oil has risen during the past 6 weeks and may be getting close to a pullback.  Notice previous rises in the price of Crude Oil have lasted around 6 weeks or so (early February through mid March, early April through mid May, late June through mid August) before a pullback occurred. 

As far as the major averages the Dow did bounce on Friday and if it attempts to rally for a few days I would look for resistance to occur in the 10100 to 10150 area which is where its 200 Day EMA (purple line), 100 Day EMA (green line) and 50 Day EMA (blue line) come into play at.  Meanwhile a key support area to watch over the next few weeks resides near 9800 (point G) which was the Dow's low in August.  

If the Dow breaks below 9800 this could lead to a much larger drop back to its longer term 38.2% Retracement Level (calculated from the October 2002 low to the February 2004 high) near 9400 (point H). 

The Nasdaq held support on Friday at its 50 Day EMA (blue line) near 1900.  If the Nasdaq tries to rally for a few days look for resistance just below 1960 which coincides with its 50% Extension Level (calculated from the January high to the August low).  Meanwhile if the Nasdaq drops below 1900 then its next support area would be just above 1840 (point I) which coincides with its 23.6% Extension Level.

A key sector to watch which will have an impact on the Nasdaq is the Semiconductors.  The Semiconductor Holders (SMH) have a key support area just below 28 which was at their September low.

The 28 level is also a key longer term support areas as well for the SMH's as this is near their 61.8% Retracement Level (calculated from the October 2002 low to the January 2004 high).  If the SMH's break below 28 this would likely lead to a drop back to the 24 level which coincides with their 76.4 Retracement Level.    

The S&P 500 held support on Friday at its 200 Day EMA (purple line) near 1100.  If it attempts to rally for a few days I would look for resistance to occur near 1123 which coincides with its 61.8% Extension Level (calculated from the March high to the August low).  Meanwhile if the S&P 500 drops below 1100 its next support level would either be at its 23.6% Extension Level near 1085 (point J) or at its August low near 1060 (point K).   

For those following the Gold and Silver sector (XAU) the XAU found support this week at their 10 Weekly EMA (blue line) just above 96 after rallying strongly the previous three weeks.  If the XAU can break above the 105 area this would likely lead to a move up to the early January high near 113 (point L). Meanwhile if the XAU drops below 96 the next area of support would be in the 93 to 94 range which coincides with its 20 Weekly EMA (green line) and 40 Weekly EMA (purple line).

When the market is correcting make sure to start jotting down a list of stocks which are developing a favorable chart pattern like the "Cup and Handle" pattern.  Remember the first thing to notice are those stocks that are forming the right side of a Cup.  Cups can develop with differing time scales as shown by  a couple of recent examples from our latest Top 100 List.

MHR has formed the right side of a longer 3 1/2 year Cup and now needs to develop a constructive Handle in the weeks ahead.

Meanwhile YHOO has formed the right side of much smaller 4 month Cup and also needs to develop a constructive Handle over the next few weeks as well. 

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