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Weekend Stock Market Analysis
(4/29/06)
The Dow and S&P 500 were basically flat this week while the
Nasdaq came under some selling pressure. A longer term chart of the Dow
shows that it has rallied back to a previous upside resistance area near 11400
which is where it stalled out three separate times in 2000 and 2001 (points A)
after attempting to bounce from oversold conditions. The question at this
point is will the Dow be able to break solidly above the 11400 leading to a move
back to its all time high made in early 2000 near 11750 (point B)? 
As we have seen in the past the
future price of Crude Oil may determine whether the Dow eventually rallies back
to its all time high or not. The price of Crude Oil which broke above a
previous upside resistance area just above 70 a few weeks ago pulled back some
this week after rallying over $12 since mid March. However it appears the
price of Crude Oil is finding support near its previous resistance level which
also coincides with its 20 Day EMA (blue line) as well. The
current action in the the price of Crude Oil looks similar to what occurred in
the Summer of 2005 when it rallied strongly from late May through early July
(points C to D) and then pulled back for a brief period of time (points D to E)
before eventually making another significant move higher from late July through
August (points E to F). If a similar pattern does develop in the weeks
ahead then this will likely have a negative affect on the Dow much like occurred
last August when the Dow came under some selling pressure (points G to H) as the
price of Crude Oil made new highs. Meanwhile if the Dow is going to make a
run at its all time high the price of Crude Oil will likely have to go through a
large correction much like occurred this past February (points I to J) as the
Dow began to rally strongly (points K to L). Thus continue to watch the
price of Crude Oil closely over the next few weeks. 
Meanwhile since last October the Dow
has been in an up trend and has either found support at its 50 Day EMA (blue
line) or along its upward sloping trend line (black line). If the price of
Crude Oil were to eventually move higher in the weeks ahead and the Dow comes
under some selling pressure the key longer term support level to watch is just
above the 11150 area which corresponds to the Dow's 50 Day EMA (blue line) and
is also close to its rising trend line. 
As
far as the Nasdaq it encountered strong resistance in the month of April near
the 2375 level (point M) but so far has been holding support near its 50 Day EMA
(blue line) which is currently around the 2315 area. I believe the key
support level to keep an eye on however is the mid April low near 2300 (point
N). If the Nasdaq were to break below the 2300 level then this could lead
to a much bigger drop back to around the 2233 level which is a longer term
support area and is also very close to its 200 Day EMA (green line).
Meanwhile if the Nasdaq is able to hold support above the 2300 level and
attempts to rally once again look for resistance at the 2375
level. 
As I have mentioned in the past the
one sector to watch that may have an affect on the Nasdaq is the
Semiconductors. The Semiconductor Index (SOX) encountered strong upside
resistance in early January of this year near the 560 level which is where it
had stalled out at previously in the early part of 2004 (point O).
Meanwhile since January of this year the SOX has been stuck in a trading range
between 480 and 560 while holding support at its 40 Weekly EMA (blue
line). At some point one of two things will occur with the SOX.
Either the SOX will break above the 560 resistance level and make a significant
move higher which will have a positive affect on the Nasdaq or it will break
below the 480 level leading to a substantial drop which will have an adverse
affect on the Nasdaq. 
As far as the S&P 500 it has
rallied back to where it stalled out in the early part of 2001 just below the
1320 level (point P) after bouncing from oversold conditions. If the
S&P 500 is able to rise above the 1320 area then its next area of
significant upside resistance appears to be around the 1360 level (point Q)
which corresponds to its longer term 76.4% Retracement Level. 
In the short term the S&P 500 so
far has been holding support at its 50 Day EMA (blue line) near 1295. If
the S&P 500 is unable to rise above the 1320 area and eventually breaks
below its 50 Day EMA then its next area of support would be at its mid April low
near 1280 (point P). 
Finally each year certain sectors of
the market outperform others as the institutional money favors different
sectors. So far in 2006 here are the leading sectors through the end of
April.
|
Total |
| Sector |
Return |
|
2006 |
| Steel-Specialty |
52.8% |
| Computer-Desktop
Software |
47.0% |
| Steel-Producers |
41.7% |
| Metal-Industrial
Products |
37.9% |
| Mining-Gold/Silver/Gems |
34.4% |
| Communication-Fiber
Optic Equip |
33.9% |
| Oil&Gas-Intl
Specialty |
32.8% |
| Machine-General
Industrial |
32.3% |
| Pollution
Control-Equipment |
31.9% |
| Beverages-Non Alcoholic |
31.4% |
Generally some of your best performing stocks will be associated
with these leading sectors. For example stocks like ATI and TIE which both
reside in the Steel-Specialty sector have doubled in price since the first of
the year.
Thus in addition to looking for stocks that are developing a
favorable chart pattern it's also important to know which sectors are performing
well versus those that aren't.
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