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Amateur Investors Weekend Stock Market Analysis (5/24/08)

http://www.amateur-investor.net/Weekend_Market_Analysis_May_24_08.htm

The sell off this week in the major averages wasn't a surprise as the past two weeks I mentioned the substantial drop in the Volatility Index (VIX) was a signal of too much complacency among the investment community. The overall pattern looks rather similar to what occurred last Fall when the VIX dropped significantly from mid August through mid October (points A to B) which was then followed by a significant drop in the S&P 500 shortly thereafter in which it fell 60 points in one week (points C to D). If the pattern from last Fall repeats itself it's possible there will be an oversold bounce next week like occurred back in late October (points D to E) before the market makes another potential substantial downward move in June much like we saw from late October through November (points E to F).



As far as the major averages the Dow appears to have developed a potential bearish looking Double Top pattern (looks like the letter "M"). However if an oversold bounce develops next week it may occur either at its 50% Retracement Level near 12440 (point G) or possibly as low as it's 61.8% Retracement Level just above 12240 (point H). Both of these Retracement Levels were calculated from the March low to the most recent high.



The Nasdaq has lost around 120 points since peaking last Monday near 2550. The Nasdaq has one key support level around the 2415 level which coincides with its 50 Day EMA (blue line) and upward sloping trend line (black line) from the mid March low while a second support area would be at its 38.2% Retracement Level near 2400 (point I). I suspect the Nasdaq will hold support at one of these two levels next week and then undergo an oversold bounce.



The Nasdaq 100 has dropped around 100 points since peaking last Monday and appears to be trying to hold support around the 1950 area (brown line). However a stronger support area exists near 1915 which coincides with its 50 Day EMA (blue line), 200 Day EMa (green line) and upward sloping trend line (black line) from the mid March low. Thus I expect we will see an oversold bounce develop at one of these two levels next week.



As far as the S&P 500 it has fallen nearly 70 points since peaking last Monday and is nearing a key short term support level around 1370 which coincides with its 50 Day Moving Average (blue line) and 38.2% Retracement Level. If the S&P 500 can hold support around 1370 early next week then we may see an oversold bounce develop. However if it breaks below the 1370 level then the next area for a potential oversold bounce to occur at would probably be at its 50% Retracement Level near 1350 (point J).



Finally when looking for stocks to invest focus on those developing a favorable chart pattern such as the Cup and Handle. As I mentioned last weekend JASO is one of the few stocks which has developed a proper Handle after forming a Cup. The proper time to buy a pattern like this is when the stocks breaks above the top of its Handle which for JASO is at the $27 level.