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Weekend Stock Market Analysis
(7/1/06)
As expected we saw a significant move occur this week as there was a Federal
Reserve Policy meeting along with it being the end of the 2nd Quarter. Fortunately
the move was to the upside and not to the downside. Since making
a short term bottom in mid June the Dow has rallied over 500 points and has
risen back above its 50 Day EMA (blue line). Over the next week or two the
key thing to watch will be if the Dow can rise above the 11275 level which is
where it stalled out at in late May and early June (point A). If the Dow
can rise above the 11275 level then it may eventually rally back to around the
11450 area. Meanwhile if the Dow is unable to rise above the 11275 level
then look for some initial support at its 50 Day EMA near 11100. If the Dow
were to break below its 50 Day EMA then look for a drop back to its 200 Day EMA
(green line) near 10950.
 The Nasdaq has rallied over 100
points since making a short term bottom in mid June but has two important
upside resistance levels which may come into play over the next few weeks.
The first upside resistance area is at the Nasdaq's 50 Day EMA (blue line) near
2190 while the second area is at its 200 Day EMA (green line) near 2210.
Thus there is a strong possibility the current oversold rally in the Nasdaq may
eventually stall out somewhere in the 2190 to 2210 range either next week or the
week after. Meanwhile if the Nasdaq does stall out at its 50 Day EMA
around 2190 in the near term and begins to come under some selling pressure look
for initial support at its 20 Day EMA (purple line) near
2145.
 As
for the S&P 500 it has rallied over 50 points since the mid June
bottom and has risen back above its 50 Day EMA (blue line). Over the next
few weeks one of two things may occur in the S&P 500. The first
possibility would be for the S&P 500 to continue higher while holding
support above its 200 Day EMA (green line) leading to a move up to the 1290 area
which is where it stalled out at in early June (point B). Meanwhile the
second possibility would be for the S&P 500 to stall out near its current
level and then break below its 200 Day EMA leading to a drop back to the 1240 area (point C).
 Now there is one thing to keep a
close eye on in the near term which is the Volatility Index (VIX). Since
mid May we saw quite an increase in fear among investors as the VIX rose from 11
up to nearly 24 by mid June (points D to E). However during the past two
weeks the VIX has dropped rapidly and now is around the 13 level (points E to
F). Over the past few years there have been similar movements in the VIX
as well where it has risen substantially and then quickly dropped. At
this point based on what is happening in the VIX two possible scenario's may
develop. The first scenario would be for this latest rally to fizzle
within a week or two leading to more selling pressure much like occurred in the
early part of 2004 when the S&P 500 rallied for 3 to 4 weeks (points G to H)
after the VIX had risen substantially (points I to J) which was then followed by
more selling pressure (points H to G) as the VIX dropped rapidly (points J to
I). Meanwhile the second scenario would be for the S&P 500 to
undergo a significant multi-week rally much like we saw late in the middle part
of 2005 and later in the year as the VIX quickly rose (points K to M) as the
S&P 500 sold off (points N to O) which was then followed by a significant
rally lasting several weeks (points O to N) as the VIX quickly dropped (points M
to K). Unfortunately at this point it's impossible to
say which of these scenario's may evolve in the weeks ahead however one of them
will probably occur.
Finally one another thing to watch is the price of Crude Oil which looks like it
maybe getting close to making another substantial move higher. Over the
past few years the price of crude Oil has been holding support at its 40 Weekly
EMA (blue line) while going through a series of pullbacks (points Q to P) before
moving higher again (points P to Q). If the price of Crude Oil were to
make another substantial move higher this could have a negative affect on the
market in the longer term.
 Since nobody truly knows where the
market is headed in the weeks ahead you have to be ready to act no matter which
direction the market may end up going. Continue to develop a list of
stocks which are forming a favorable chart pattern. For example
BPT has just completed the right side of a 1 1/2 year Cup and now needs to start
developing a constructive Handle over the next few weeks. 
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