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Amateur Investor Weekend Update (3/8/08)

http://www.amateur-investor.net/Weekend_Market_Analysis_Mar_8_08.htm

The selling pressure continued this week with the Nasdaq being the first major index to retest its January 23rd low. The question is now will the Nasdaq make a significant bottom in the next week or two leading to the development of a potential Double Bottom pattern like occurred in 2006 or will it make another significant move downward with an eventual drop back to its longer term 50% Retracement Level?

Back in 2006 the Nasdaq formed a Double Bottom pattern as the 2nd bottom dropped slightly below the 1st bottom which was then followed by a significant rally. If the Nasdaq is going to form a Double Bottom pattern in the near term we probably don't won't to see it drop below the 2150 area next week.



Meanwhile if the Nasdaq fails to develop a Double Bottom pattern in the near term and makes another significant move lower the next major support level would be at its longer term 50% Retracement Level near 2030 which is also very close to the low made in 2006 (point A).



The Dow also has a chance of forming a Double Bottom pattern over the next week or two much like occurred in 2006 if it can find support at one of these two levels. The first support area to watch for would be at the January 23rd low at 11635.



Meanwhile the 2nd support area that could also come into play would be at its longer term 38.2% Retracement Level near 11500 (point B). In order for the Double Bottom pattern to occur the Dow must hold support at or above the 11500 level. If the Dow were to drop solidly below the 11500 area then I expect it may eventually fall back to its longer term 50% Retracement Level near 10700 which also coincides with the 2006 low (point C).



As far as the S&P 500 just like the Dow and Nasdaq it has a chance to form a Double Bottom pattern like in 2006 if it can hold support next week near the 1270 level which was the January 23rd low.



Also the 1270 level is very close to the S&P 500's longer term 38.2% Retracement Level which is at 1268 (point D). Thus if a Double Bottom pattern is going to develop we probably don't want to see the S&P 500 drop too far below the 1268 level. If the S&P 500 were to fall well below the 1268 level then its next major area of support would probably be at its longer term 50% Retracement Level near 1170 (point E).



Meanwhile fear has increased somewhat among investors as the recent 5 Day Average of the Put to Call Ratio has now reached the 1.20 level. In the past when the 5 Day Average of the Put to Call Ratio has risen to or above the 1.20 level (points F) some significant oversold rallies (generally 10% or more) have developed within a few weeks in the S&P 500 (points G to H). The last time the 5 Day Average of the Put to Call Ratio reached the 1.2 level was in the 3rd week of January (point I) which was followed by a sharp 10% oversold bounce in the S&P 500 (points J to K).



As talked about in the beginning it's possible we could see a potential bottom occur before much longer so now is a good time to start searching for stocks which have been holding up well.

For example ATLS has completed the right side of a 4 month Cup and now needs to develop a constructive Handle over the next few weeks to form a favorable Cup and Handle pattern.