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Tuesday, July 29, 2003 8:56:25 PM
Amateur Investor Mid Week Market Analysis (7/29/03)
Nothing has changed during the first two days of trading this week as both the Dow and S&P 500 continue to remain in their trading ranges. Eventually they will break strongly in one direction or the other so we continue to sit and wait for the next major move.
The key levels to watch in the Dow are just above 9350 (top of trading range) and near 8850 (bottom of trading range). Any break above or below these levels will likely lead to a significant sustained move to the upside or downside.
The key levels to watch in the S&P 500 are near 1015 (top of trading range) and 960 (bottom of trading range). Just like the Dow any break above or below these levels will probably lead to a substantial longer term move.
As for the Nasdaq so far it has been able to hold support at the upper end of its previous trading range before breaking out in early July near the 1680 level. If the Nasdaq can break above the mid July high near 1775 (point A) on good volume that would be a positive sign. However if it drops below the 1680 level then that could lead to a sustained downward move.
Meanwhile those of you that pay attention to the Volatility Index (VIX) know that it has been remaining at a fairly low level for several weeks now. There was a good article on Yahoo Finance yesterday concerning the VIX and how to use its 10 Day Moving Average (MA) to determine when the market may actually reverse strongly to the upside or downside. One of the key points in the article was to notice when the VIX got stretched away from its 10 Day MA after a considerable move to the upside or downside which was a signal of a nearing market reversal.
The chart below compares the VIX and its 10 Day MA (blue line) to the S&P 500 over the past two years. Notice when the VIX has made a considerable move to the upside (5 days or more) and gotten extended from its 10 Day MA that the market has made a bottom and then rallied. Some cases include October of 2002 (point B), July of 2002 (point C) and September of 2001 (point D). However this past February and March (point E) the VIX didn't really get that far extended from its 10 Day MA as the market made a bottom as compared to previous bottoms.
Meanwhile the exact opposite can happen as well when the VIX drops well below its 10 Day MA which can leading to a nearing top and potential sell off. Some cases include January of 2003 (point F), November of 2002 (point G), August of 2002 (point H), March of 2002 (point I) and November and December of 2001 (point J). Also notice what happened this past May as once again the VIX got stretched way below its 10 Day MA (point K) but the market didn't sell off and has remained basically in a trading range since early June. In addition notice how the recent readings in the VIX still haven't gotten stretched significantly away from their 10 Day MA as compared to previous times when the market has made a top and reversed to the downside. This may provide the key to when the market may begin to reverse to the downside once the VIX becomes more stretched away from its 10 Day MA.
Finally it's always important to watch the market leaders as this can give you an idea of what could be lurking down the road. The internet sector has been very strong ever since last October as Ebay and Yahoo have been some leaders. So far both of of them have held support at their 50 Day EMA's since last October but they are beginning to show signs of some weakness. If they eventually break below their 50 Day EMA's this could not only spell trouble for them but for the market in general so keep an eye on these two stocks over the next few weeks.
Nothing has changed during the first two days of trading this week as both the Dow and S&P 500 continue to remain in their trading ranges. Eventually they will break strongly in one direction or the other so we continue to sit and wait for the next major move.
The key levels to watch in the Dow are just above 9350 (top of trading range) and near 8850 (bottom of trading range). Any break above or below these levels will likely lead to a significant sustained move to the upside or downside.
The key levels to watch in the S&P 500 are near 1015 (top of trading range) and 960 (bottom of trading range). Just like the Dow any break above or below these levels will probably lead to a substantial longer term move.
As for the Nasdaq so far it has been able to hold support at the upper end of its previous trading range before breaking out in early July near the 1680 level. If the Nasdaq can break above the mid July high near 1775 (point A) on good volume that would be a positive sign. However if it drops below the 1680 level then that could lead to a sustained downward move.
Meanwhile those of you that pay attention to the Volatility Index (VIX) know that it has been remaining at a fairly low level for several weeks now. There was a good article on Yahoo Finance yesterday concerning the VIX and how to use its 10 Day Moving Average (MA) to determine when the market may actually reverse strongly to the upside or downside. One of the key points in the article was to notice when the VIX got stretched away from its 10 Day MA after a considerable move to the upside or downside which was a signal of a nearing market reversal.
The chart below compares the VIX and its 10 Day MA (blue line) to the S&P 500 over the past two years. Notice when the VIX has made a considerable move to the upside (5 days or more) and gotten extended from its 10 Day MA that the market has made a bottom and then rallied. Some cases include October of 2002 (point B), July of 2002 (point C) and September of 2001 (point D). However this past February and March (point E) the VIX didn't really get that far extended from its 10 Day MA as the market made a bottom as compared to previous bottoms.
Meanwhile the exact opposite can happen as well when the VIX drops well below its 10 Day MA which can leading to a nearing top and potential sell off. Some cases include January of 2003 (point F), November of 2002 (point G), August of 2002 (point H), March of 2002 (point I) and November and December of 2001 (point J). Also notice what happened this past May as once again the VIX got stretched way below its 10 Day MA (point K) but the market didn't sell off and has remained basically in a trading range since early June. In addition notice how the recent readings in the VIX still haven't gotten stretched significantly away from their 10 Day MA as compared to previous times when the market has made a top and reversed to the downside. This may provide the key to when the market may begin to reverse to the downside once the VIX becomes more stretched away from its 10 Day MA.
Finally it's always important to watch the market leaders as this can give you an idea of what could be lurking down the road. The internet sector has been very strong ever since last October as Ebay and Yahoo have been some leaders. So far both of of them have held support at their 50 Day EMA's since last October but they are beginning to show signs of some weakness. If they eventually break below their 50 Day EMA's this could not only spell trouble for them but for the market in general so keep an eye on these two stocks over the next few weeks.
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