Sector Investing

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Amateur Investors Mid Week Market Analysis (4/13/04)

http://www.amateur-investors.com/Mid_Week_Market_Analysis_4_13_04.htm

As mentioned in our Weekend Market Analysis the prospects of rising Interest Rates and high Oil Prices may act as a long term negative for the market. It looks like the market is beginning to realize that this may become a problem down the road.

In the near term the major averages need to hold support near their respective 50 Day EMA's because if they don't then this will likely lead to a retest of the late March lows rather quickly. The Dow closed just below its 50 Day EMA (blue line) near 10400 and if it fails to hold support near this level the next area of short term support would be at its 100 Day EMA (green line) near 10275. If the Dow breaks below 10275 then it will likely drop back to its late March low near 10000 (point A) or its 200 Day EMA (purple line) near 9925.



The Nasdaq needs to hold support at its 50 Day EMA around 2010 to be constructive in the near term. If the Nasdaq fails to hold support near 2010 then the next area of support would be at its 100 Day EMA (green line) near 1990. A drop below 1990 would likely lead to a much bigger fall back to its previous late March low near 1890 (point B) which is also close to the Nasdaq's 200 Day EMA (purple line).



The S&P 500 closed near its 50 Day EMA (blue line) near 1130. If the S&P 500 fails to hold support at its 50 Day EMA then look for the next area of short term support at its 100 Day EMA (green line) near 1110. If the S&P 500 fails to hold support near 1110 then look for a retest of its late March low near 1090 (point C).



Another thing to keep in mind is that the S&P 500 is heavily influenced by the Banking Sector (BKX). A chart of the BKX shows that it's nearing a key short term support area at its 100 Day EMA (green line) near 98. If the BKX breaks below 98 this could lead to a much larger drop back to its 200 Day EMA (purple line) around 94 and also have a significant affect on the S&P 500 so watch the BKX closely over the next few days.



Another key sector to watch is the Semiconductors. The Semiconductor Holders (SMH) are at a key short term support zone in the 40.25 to 40.50 area which coincides with their 50 Day EMA (blue line) and 100 Day EMA (green line). If the SMH's break below 40 this could lead to a quick drop back to their 200 Day EMA (purple line) around 38.25 or their previous late March low just below 37 (point D).



Although I spend a lot of time focusing on stocks for upside potential I also look for those stocks that may provide shorting opportunities as well especially when the market is going through a correction or pullback. One pattern to look for when screening for stocks to short is the "Head and Shoulders Top" pattern.

ALVR is a recent example of a stock that is exhibiting a Head and Shoulders Top pattern and briefly broke below its Neckline today. If ALVR continues lower in the days ahead its next major support area would be at its 200 Day EMA (purple line) just below $10.40 and that is where I would cover my short position if a position was initiated. Meanwhile if ALVR decides to reverse to the upside instead then I would place a Stop Loss Order near the top of its 2nd Shoulder around $13.50 or so.