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Weekend Stock Market Analysis

(7/24/04)

Major Averages

Both the Dow and S&P 500 are approaching key longer term support areas.  The Dow has a key support area in the 9850 to 9900 range which coincides with its May low and longer term 23.6% Retracement Level calculated from the October 2002 low to the February 2004 high.  The Dow must hold support next week at or above 9850.  If the 9850 level is broken this could eventually lead to a more substantial drop back to its longer term 38.2% Retracement Level near 9400 (point A) in the weeks ahead.  

Meanwhile if the Dow can hold support next week near 9850 and tries to bounce from oversold conditions look for the first area of upside resistance at its 200 Day EMA (purple line) just below 10100 with a more significant area of resistance near 10250 which coincides with its 50 Day EMA (blue line) and 100 Day EMA (green line).  

The S&P 500 is also approaching a key support area in the 1070 to 1077 range which coincides with its May low and longer term 23.6% Retracement Level calculated from the October 2002 low to the March 2004 high.  Thus it will be important for the S&P 500 to hold support at or above the 1070 level next week.  If the 1070 area is broken this could eventually lead to a much bigger drop back to the S&P 500's longer term 38.2% Retracement Level near 1010 (point B) in the weeks ahead.

Meanwhile if the S&P 500 can hold support at or above 1070 next week and begins to bounce from oversold conditions look for initial resistance at its 200 Day EMA (purple line) around 1095 with an even stronger area of upside resistance around 1118 which coincides with its 50 Day EMA (blue line) and 100 Day EMA (green line).

As far as the Nasdaq it has failed to hold support at its May low (near 1870) and longer term 23.6% Retracement Level calculated from the October 2002 low to the January 2004 high.  If the Nasdaq continues lower its next major support level is at its longer term 38.2% Retracement Level near 1755 (point C).

In the near term the Nasdaq is rather oversold and it tried to bounce early in the week but encountered strong resistance at its 200 Day EMA (purple line) near 1930.  If the Nasdaq attempts to bounce again before reaching its next major downside support area near 1755 I would imagine the 200 Day EMA will continue to act as significant upside resistance area.

Major Sectors

The Semiconductor Holders (SMH) have been in a downward trend since January as denoted by the solid brown line and have been making a series of lower lows and lower highs.   However so far the  SMH's have been able to hold support at their longer term 50% Retracement Level just above 31.50.  If the SMH's can hold support at this level next week and begin to bounce from oversold conditions look for the first area of upside resistance at their 10 Weekly EMA (blue line) which is nearing 35.  Meanwhile if the SMH's break below 31.50 then this could lead to an eventual drop back to their longer term 61.8% Retracement Level near 28 (point D).

The Banking sector (BKX) so far has held support at its longer term 23.6% Retracement Level just above 93.  If the BKX drops below 93 the next level of downside support would be at the May low near 90 (point E).   Meanwhile if the BKX can hold support near 93 and attempts to rally I would look for initial resistance at its 20 Weekly EMA (green line) near 96. 

The Broker/Dealers (XBD) also have been in a downward trend (brown line) since January as well and have broken below their longer term 38.2% Retracement Level.  If the XBD's continue lower their next area of support would be at their longer term 50% Retracement Level near 107 (point F).  Meanwhile if the XBD's try and bounce from oversold conditions I would look for initial resistance around 123 (10 Weekly EMA) with even stronger upside resistance near 126 which coincides with their 20 Weekly EMA, 40 Weekly EMA and downward sloping trend line..

The Gold and Silver sector (XAU) has run into resistance at its 40 Weekly EMA and is at a key short term support level near 84 which is along its newly developing upward sloping trend line (brown line) from the May low.  If the XAU drops below 84 then look for a retest of its May low near 76 (point G). 

Contrarian Indicators

The Volatility Index (VXN) which tracks the Nasdaq 100 is beginning to show signs of fear among investors as it has risen into the mid 20's.  However the VXN still hasn't reached a level like we saw in mid May (point I) or in mid March (point J) when it rose into the upper 20's to around 30 which a bounce from oversold conditions.  

Meanwhile despite the weakness in the market there is still quite a bit of Bullish sediment out there among the investment advisors as the % difference between the Bullish and Bearish investment advisors is still quite large.  When significant market bottoms have occurred in the past the % difference between the Bullish and Bearish investment advisors has trended towards zero or even become negative as the % of Bearish advisors outnumbered the % of Bullish advisors (points K). 

When the market is correcting it's very important to start noticing which stocks are holding up well and developing a favorable chart pattern versus those that aren't.  As mentioned last weekend you should be looking for those stocks which are forming the right side of a Cup such as TXI has over the past two years.  Now what I will be watching for over the next few weeks is for TXI to start developing a constructive Handle to complete a "Cup and Handle" pattern.

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