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Amateur Investors Weekend Stock Market Analysis (10/27/07)

http://www.amateur-investor.net/Weekend_Market_Analysis_Oct_27_07.htm

During the past two weeks there has been an increase in daily volatility as shown by a 30 minute intra day chart of the Nasdaq shown below. Also many of the significant moves are occurring right after the market opens followed by sharp reversals in the opposite direction shortly thereafter. Suffice to say this type of action makes it a very volatile market to invest in and with a Federal Reserve Policy meeting next Wednesday I expect we are going to see a lot more daily volatility leading up to and after this meeting.



As far as the major averages the Dow made a bottom on Monday around 13400 (point A) and has rallied back up to its 20 Day EMA (blue line) near 13800.



If the Dow continues to bounce into next Wednesday's Federal Reserve meeting look for potential upside resistance to occur around the 13900 area which coincides with its 61.8% Retracement Level (point B) calculated from the high made a few weeks ago to the low made on Monday.



As far as the Nasdaq it held support near its 50 Day EMA (green line) on Monday and is attempting to rally back to its previous high made just a few weeks ago near 2835 which may act as a significant area of resistance if it continues to rally leading up the Federal Reserve meeting next Wednesday.



The S&P 500 held support early in the week near 1490 (point C) and has rallied back above its 20 Day EMA (blue line).



If the S&P 500 continues to move higher leading up to the Federal Reserve meeting on Wednesday look for potential resistance to develop near the 1544 level which coincides with its 61.8% Retracement Level (point D) calculated from the high made a few weeks ago to the low made earlier in the week.



Meanwhile one thing to be on the lookout for next week is the possibility of seeing more selling pressure develop much like occurred back in early August. The last time the Dow sold off rather hard was from mid July though early August (points E to F) which was then followed by choppy 6 day rally (points F to G). This was then followed by another round of selling pressure through mid August before the Dow made a true bottom (points G to H).



Finally another thing I'm concerned with in the longer term is the action in the Semiconductors. Historically the Nasdaq and the Semiconductor Index (SOX) have generally trended in the same direction. The SOX which peaked in mid July (point I) has been trending lower (points I to J) while the Nasdaq has been trending higher since mid August (points K to L). The last two times the SOX put in a top back in early 2006 (point M) and further back in early 2004 (point N) this was followed by a significant correction (points M to O and N to P) which was eventually followed by substantial correction in the Nasdaq as well (points Q to R). Thus we shall see if the Nasdaq eventually comes under some significant selling pressure in the months ahead if the SOX continues to trend lower.



With all of the volatility in the market some of your best opportunities will be in the Exchange Traded Funds (ETF). For example last Sunday we told our members to Buy at the open on Monday because the market had become very oversold. This was based on our research that shows when the Volatity Index (VIX) rises by 24% or more from the previous day this leads to a strongly oversold market as shown by the table below.

VIX Change versus Short term Performance in the SPY

  
 Signal Previous Next Day  VIX Open Price 5 Day Net  
 Date     Close   Close  Change next Day SPY   High SPY Change SPY  
 10/19/07 18.50   22.96   24.1%     148.84       153.62    +4.78  
 3/13/07  13.99   18.13   29.6%     138.43       141.05    +2.62  
 2/27/07  11.15   18.31   64.2%     140.39       141.98    +1.59  
 5/30/06  14.26   18.66   30.9%     126.58       129.43    +2.85

Here is a recent daily chart of the VIX versus the SPY. Last Friday the VIX rose 24% from the previous days close which was followed by a quick $3 upward move in the SPY over the next two trading days (points A to B).