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Weekend Stock Market Analysis

(1/17/04)

The major averages continue to move higher however they could undergo some type of correction/pullback at anytime.  All three major averages still appear to be exhibiting a Wave #3 pattern for those that follow Elliot Wave Theory.  Once again for those not familiar with  Elliot Wave Theory a simple example is shown below.

Notice how Waves 1,3 and 5 are upward moves with Wave 3 lasting the longest while Wave 5 is the shortest.  Meanwhile also notice that Waves 2 and 4 are corrective Waves which only last for a brief period of time before the upward trend continues.  

As you can see from the charts below the Dow, Nasdaq and S&P 500 appear to still be in a Wave #3 pattern and are due for some type of corrective 4th Wave.  The Dow is approaching a significant longer term upside resistance zone around the 10700 level which coincides with its 2002 high (point A) and 76.4% Retracement Level.  It will be interesting to see if it can break above this resistance area before undergoing a corrective 4th Wave.

The Nasdaq has broke above its longer term 23.6% Retracement Level which was around 2050 and has risen just above its 2002 high near 2100 (point B).  If the Nasdaq continues higher in the near term it could encounter upside resistance around 2200.

The S&P 500 is approaching a longer term upside resistance area just above 1150 which coincides with its 50% Retracement Level and high made in 2002 (point C).  

I would be very surprised if some type of correction/pullback doesn't occur before much longer as the major averages are very overextended from their 50 Day EMA's.  Since late November the Dow has gained 1000 points.  The last two times the Dow has gained around 1000 points in a very short period of time (last March and again from May into June) this was followed by a quick drop of around 500-600 points.  If the Dow stalls out in the 10600 to 10700 range and then undergoes a similar pullback of around 500-600 points then I would look for support in the 10100 to 10200 range which is near its 50 Day EMA (green line).  

The Nasdaq has gained nearly 240 points since mid December and I would find it amazing if it can sustain this pace for much longer.  The last time the Nasdaq saw this strong of a move was back in August and September when it gained nearly 260 points over a 6 week period which was then followed by a quick drop of around 110 points.  

As far as the S&P 500 it has gained over 100 points since late November and is also due for some type of correction/pullback before much longer.  The last two times the S&P 500 has gained over 100 points was from late May into June and back in March.  This was then followed by a 50 point drop in both cases.   

Although the major averages could still rise a bit more as they rally up to their longer term resistance zones we should be prepared for some type of correction/pullback to occur before much longer.

Meanwhile some of you have asked me about the Gold sector which got sold off hard last week.  As I have mentioned in the past the Gold sector (XAU) ran into strong resistance at its longer term 61.8% Retracement Level just above 112 (calculated from the 1996 high to the 2000 low).  I also mentioned that the XAU had developed the right side of a longer term 6 year Cup and needed time to develop a constructive Handle before making another significant run higher.  At this point that appears to be what is happening. 

Now the key levels to watch for support over the next few weeks in the XAU are at its 23.6% Retracement Level near 96 (calculated from the 2000 to its most recent high) and at its 40 Weekly EMA (green line) near 92 as it continues to try and develop a Handle. 

Finally sometimes you have to be patient with a stock and wait for a second opportunity to arise after the initial breakout attempt fails to follow through.  Seven weeks ago CCBL tried to breakout of a Cup and Handle (H) pattern but failed to follow through to the upside (point D).  Over the next 4 weeks CCBL remained in a trading range between $10 and $12 but then broke out strongly earlier this month accompanied by strong volume (point E).   As this example shows if a stock does fail to breakout to the upside on its first attempt you still have to pay close attention to it as it may eventually follow through strongly to the upside on the second attempt.

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