Sector Investing

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Amateur Investors Mid Week Market Analysis (5/11/04)

The market appears to be bouncing form oversold conditions which I mentioned over the weekend to be prepared for this week. There were two things showing up that indicated to me a reversal was nearing. First the Semiconductor Holders (SMH) were strong last week while the Nasdaq continued to falter. Notice in the chart below the SMH's made a bottom last Monday while the Nasdaq eventually headed lower by the end of the week.



Secondly the Volatility Index (VIX) spiked up strongly on Monday (point A) and closed well above its 10 Day Moving Average (blue line) as some fear entered the market. However the VIX still didn't rise to the level that occurred in late March (point B) so the question is was enough fear generated on Monday to allow for a significant bounce to develop like we saw from late March through early April (points C to D).



As far as the major averages the Dow is trying to hold support near its 200 Day EMA (purple line) around 10000 which is also near its longer term 23.6% Retracement Level calculated from the October 2002 low to the 2004 high. If your an optimist you could make the case for a potential "Double Bottom" scenario if the Dow can hold support near 10000 with a potential rally back to the 10300 area which is near its 50 Day EMA (blue line) and 100 Day EMA (green line). However if the Dow is unable to hold support near 10000 then this would likely lead to an eventual bigger drop back to its longer term 38.2% Retracement Level near 9400 or so.



The Nasdaq which broke below its late March low on Monday reversed today and closed back above its 200 Day EMA (purple line). Just like the Dow if we take a positive spin on things the Nasdaq possibly could be in the early stages of a potential "Double Bottom" pattern if it can hold support the rest of this week above its intra day low on Monday. If the Nasdaq follows through to the upside I would expect quite a bit of resistance to occur near 1980 which is where its 50 Day EMA (blue line) and 100 Day EMA (green) are converging at. Meanwhile if the Nasdaq fails to hold support near its intra day low on Monday then this would probably lead to an eventual drop back to its 38.2% Retracement Level (calculated from the October 2002 low to the early 2004 high) near 1760 or so in the longer term.



The S&P 500 held support on Monday right at its 200 Day EMA (purple line) near 1080. If the S&P 500 can hold support at or above 1080 the rest of this week then hopefully this would lead to a potential "Double Bottom" pattern as well with an eventual rally back up to the 1110 (100 Day EMA) or 1120 (50 Day EMA) range. Meanwhile if the S&P 500 fails to hold support near 1080 then this could eventually lead to a bigger drop back to its longer term 38.2% Retracement Level (calculated from the October 2002 low to the early 2004 high) near 1015 or so.



Finally as mentioned over the weekend continue to look for those stocks that have formed a Cup and are developing a Handle. SFCC provides a current example of a stock which has formed a 7 month Cup and is now beginning to develop a small 2 week Handle (H).