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Weekend Stock Market Analysis

(6/19/04)

Three things concern me at the moment.  First the Volatility Index (VXN) which tracks the Nasdaq dropped to its lowest level in over a year on Friday (point A).  As I have pointed out before the last three times the VXN has dropped to around 20 this has led to an eventual top followed by a sell off (points B).

The second thing that occurred this week was the breakdown of the Semiconductor sector.  The Semiconductor Holders (SMH) have broken well below their previous small upward sloping trend line (solid black line) which originated from the early May low.  If more selling pressure occurs in the SMH's this will likely have a negative affect on the Nasdaq.  In the very near term we could see a brief rally in the SMH's as they are becoming somewhat oversold based on the Slow Stochastics as the %K Line has fallen well below 20 (C).   

Thirdly the Oil sector (OIX) rallied this week and is is attempting to break out of a longer term Cup and Handle pattern.  If the Oil sector follows through to the upside in the weeks ahead will this have an adverse affect on the major averages in the future if the price of Oil begins to rise again.

As far as the major averages the Nasdaq has a key short term support area around 1960 (point D) which has held twice before so far this month.  Meanwhile the Nasdaq encountered resistance a few weeks ago near its downward sloping trend line (solid brown line) originating from the January high.  If the low reading in the VXN leads to the development of selling pressure in the Nasdaq and it drops below 1960 then look for the next support area at its 200 Day EMA (purple line) around 1925.  Meanwhile if the Nasdaq can break above the 2025 area (point E) which is where it stalled out a few weeks ago then this could lead to a quick move up to the 2060 to 2080 range.

The Dow has been in a small trading range (TR) between 10320 and 10450 over the past 8 trading days.  Eventually the Dow will break out of this small trading range and either make a move up to its April high near 10575 (point F) or it will drop back to where its 50 Day EMA (blue line) and 100 Day EMA (green line) are converging at near 10250.  

As far as the S&P 500 it has been basically stuck in a trading range over the past 8 trading days between 1140 (point G) and its 50 Day EMA (blue line) near 1120. If the S&P 500 can break above 1140 look for it to rise up to the 1152 to 1162 range which corresponds to its April high (point H) and March high (point I).  Meanwhile if the S&P comes under some selling pressure look for initial support in the 1115 (100 Day EMA) to 1120 range (50 Day EMA).  If the S&P 500 breaks below 1115 then its next longer term support area would be at its 200 Day EMA (purple line) near 1088.     

For those of you following the Gold and Silver sector (XAU) it rallied this week after becoming oversold the previous week as the %K Line in association with the Slow Stochastics approached zero (point J).  The XAU is approaching its first area of upside resistance at its 50 Day EMA (blue line) near 88.  If the XAU breaks above 88 I would expect even stronger upside resistance to occur near 92 which is where its 100 Day EMA (green line) and 200 Day EMA (purple line) reside at.  Meanwhile if the XAU stalls out near 88 and then reverses to the downside look for support near its early May low around 77 (point K).

For those not familiar with the Slow Stochastics Indicator it basically gives a signal of overbought or oversold conditions.  Generally when the %K Line drops to 20 or below (points L) that is a signal the market is becoming oversold and will eventually reverse to the upside.  Meanwhile when the %K Line rises at or above 80 (points M) that is a signal the market is becoming overbought and will eventually reverse to the downside.  As with any indicator it's not always perfect as these examples show.  Notice in December of 2003 the %K Line rose above 80 (point N) however the Nasdaq still rose substantially through the middle part of January 2004 before topping out.  Another more recent example occurred in early May as the %K Line dropped below 20 (point O) and the Nasdaq rallied briefly for a few days before eventually going lower and not making a bottom until a week or so later.  Although the Slow Stochastics aren't perfect more times than not they do pretty well in forecasting a nearing market reversal.  

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