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  Weekend Stock Market Analysis

(9/11/04)

Two things concern me at the moment which involve the Contrarian Indicators.  First the Volatility Index (VXN) that tracks the Nasdaq 100 has now dropped below 20 (point A) and is approaching its 52 week low that was made in late June.  During the past year when the VXN has dropped to 20 or below (points B) a sell off has followed shortly thereafter.

Secondly the Volatility Index (VIX) which tracks the S&P 500 is showing a similar pattern as well as it has dropped below 14 (point C).  During the past year when the VIX has dropped to 14 or below (points D) this has been followed by a reversal to the downside.

With both the VIX and VXN back at very low levels again this is an increasing sign of complacency in the market and is a signal that investors should be prepared for a possible reversal of the current upward trend which began in mid August.

As far as the major averages the Dow so far has been unable to break above its 61.8% Extension Level (calculated from the February high to the August low) just below 10400 (point E).  If the Dow attempts to rally next week I would imagine this will act as a possible resistance area to the upside.  If the Dow is able to break above 10400 then it could make a quick move up to its June high near 10500 (point F) before a downside reversal occurs.  Meanwhile if the Dow is unable to break above the 10400 level and begins to sell off I would look for initial support in the 10175 to 10200 area which is where its 50 Day EMA (blue line), 100 Day EMA (green line) and 38.2% Extension Level come into play at.  If the Dow breaks below 10175 then its next support level would be at its 200 Day EMA (purple line) near 10100.

As far as the Nasdaq it rallied strongly on Thursday and Friday due to strength in the Semiconductors which I will talk about later.  The Nasdaq is now approaching a significant upside resistance area just above 1900 (point G) which corresponds to its 100 Day EMa (green line), 200 Day EMA (purple line) and 38.2% Extension Level (calculate from the January high to the August low).  It will be very interesting to see what happens to the Nasdaq next week once the 1900 level is reached.  Will the Nasdaq stall out near 1900 and then reverse to the downside or will it break through the 1900 area leading to a more substantial move up to its next level of significant resistance around 1950 which is at its 50% Extension Level (point H)?   

As mentioned above the strength in the Nasdaq on Thursday and Friday was tied to the Semiconductors as the Semiconductor Holders (SMH) were able to hold support near their longer term 61.8% Retracement Level (calculated from the October 2002 low to the August January 2004 high) near 28 (point I).

The question is now have the SMH's made a significant bottom or is this just a bounce from oversold conditions.  The key thing to watch will be how the SMH's act if they rally back to their 50 Day EMA (blue line) near 31.50.  Will the SMH's be able to rally above their 50 Day EMA leading to more substantial move up to their 100 Day EMA near 33.75 or will they stall out near their 50 Day EMA and then begin to come under more selling pressure?    

The S&P 500 has been encountering resistance at its 61.8% Extension Level (calculated from the March high to the August low) near 1123.  If the S&P 500 continues higher it has a chance to rally up to the 1140 to 1145 area which coincides with its late June high and 76.4 Extension Level before a downside reversal occurs.  Meanwhile if the S&P 500 stalls out near its 61.8% Extension Level and reverses to the downside look for initial support around 1105 range which coincides with its 50 Day EMA and 100 Day EMA (green line). 

As far as a few sectors to watch Gold and Silver (XAU) look interesting as it looks like it has developed a possible Cup and Handle (H) pattern.  If the XAU breaks out of its Handle and above 96 look for a quick move back up to the 106 area (point J).  Meanwhile if the XAU breaks below 90 this would negate the Cup and Handle pattern and probably lead to a quick drop back to its July low near 81 (point K). 

Meanwhile for those watching the price of Crude Oil so far it has held support at its 100 Day EMA (blue line).  Watch the the 45 level next week very closely as a break above 45 could lead to a move back to the August high near 50 which could cause some selling pressure in the market.  Over the past several months the Dow and Crude Oil have generally been going in opposite directions of each other.  For example when the price of Crude Oil has trended higher the Dow has trended lower and vice versa (points L to M and M to L). 

Investing in stocks isn't guesswork as you have to recognize those stocks which are developing a favorable chart pattern.  As mentioned in our Mid Week Analysis stocks which develop a Triangle pattern can make substantial moves in a short period of time.  Another chart pattern to look for is a Flat Base which forms as a stock remains in a trading range for a period of time.  

NUE provides a good example of a stock which developed a 6 week Flat Base before breaking out this week.  Notice during the 6 week period it developed a trading range between $76 and $84.  The proper time to buy NUE was when it broke above the $84 level.

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