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  Weekend Stock Market Analysis

(9/4/04)

Although the market has gone through a nice 3 week rally from oversold conditions a few things are developing which could signal the major averages are potentially getting close to a top.  First the Volatility Index (VIX) which tracks the S&P 500 has dropped back below a value of 14 (point A) which has signaled a nearing top on three separate occasions during the past year (points B).  

Meanwhile the second thing that is worrisome is the action in the Semiconductors as the Semiconductor Holders (SMH) haven't been acting well and are back at a critical longer term support area near their 61.8% Retracement Level (point C) just above 28 (calculated from the October 2002 low to the January 2004 high).  If the SMH's fail to hold support near 28 then look for an eventual  drop back to their 76.4% Retracement Level at 24 (point D) which will likely lead to additional selling pressure especially in the Nasdaq.  

As far as the major averages the Dow has rallied back above its 50% Extension Level (calculated from the February high to the August low) and has risen over 500 points since mid August.  If the Dow comes under more selling pressure I would look for short term support in the 10150 to 10175 range which is where its 50 Day EMA (blue line), 100 Day EMA (green line) and 38.2% Extension Level reside at.   I believe the highest level the Dow may reach during the month of September would be just below 10400 as that is where its 61.8% Extension Level (point E) resides at.   

The Nasdaq has encountered resistance at its 50 Day EMA (blue line) near 1875 and reversed strongly to the downside on Friday mainly due to Intel's negative mid quarter update.  If  more selling pressure occurs early next week in the Nasdaq a key short term support level to watch is around 1820 (point F).  If the Nasdaq breaks below1820 this would likely lead to a retest of the mid August low near 1750 at some point in September.  Meanwhile if the Nasdaq can hold support near 1820 and eventually rally above its 50 Day EMA I would expect significant upside resistance to occur in the 1900 to 1910 range which is where its 38.2% Extension Level, 100 Day EMA (green line) and 200 Day EMA (purple line) reside at. 

The S&P 500 has rallied back to just below its 61.8% Extension Level (calculated from the March high to the August low) near 1123 (point G).  If some selling pressure develops in the S&P 500 I would look for short term support in the 1100 to 1105 range which is where its 50 Day EMA (blue line), 100 Day EMA (green line) and 38.2% Extension Level reside at.  Meanwhile to the upside I would expect the S&P 500 to run into resistance around the 1123 which as mentioned above is at its 61.8% Extension Level.  If the S&P 500 can break above 1123 then this could eventually lead to a move up to its 76.4 Extension Level near 1140 at some point in September.

For those watching the price of Crude Oil there was a bounce this week from oversold conditions as Crude Oil held support at its 100 Day EMA (blue line) near $41.  The two levels I will be watching over the next few weeks are at $45 and $41.  If Crude Oil breaks above $45 then it could rise back to its mid August high near $50.  However if Crude Oil breaks below $41 then look for a drop back to its 200 Day EMA (red line) near $38.25.  

Another thing to notice is that the Dow and the price of Crude Oil have been generally moving in opposite directions of each other over the past several months.  Notice when the price of Crude Oil has made a substantial drop (points H to I) the Dow has rallied and when the price of Crude Oil has rallied (points I to H) the Dow has dropped.  It will be interesting to see if this inverse relationship continues in the months ahead.

Meanwhile when looking for stocks to invest in concentrate on those which are developing a favorable chart pattern such as the "Cup and Handle".  A stock from our current Stocks to Watch List which has developed a "Cup and Handle" pattern is TWP.  TWP formed a 2 year Cup and has developed a Handle (H) during the past 5 weeks.  Meanwhile the proper time to buy TWP would be when it breaks above the top of its Handle which is currently around $45.

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