|Is the Worst Over?|
|Written by L.A. Little|
|Monday, 24 October 2005 16:11|
The market appears to have finally scratched out an intermediate term bottom and it's time to revisit our thesis to guide our thoughts in the coming weeks of trading. The context is that we are in an intermediate term down trending market and I don't believe that is about to change. Short term though, a move higher within that downtrend appears to be shaping up and we need to adjust our thoughts to account for that action and profit by it.
Starting with a chart of the SPX, look at how the trend line was broken to the downside. I don't have the moving averages shown on here but the 200 day moving average sits right at 1200 SPX. That 1200 area will again be a problem on the way up, but if you consider that the year end rally is so anticipated and many times it happens despite whether it should or shouldn't, I can envision a case where we push back to as high as 1220-1225 SPX by late November, early December. That would take the price up to the underbelly of the other trend line that I have drawn in.
In conjunction with the above thoughts, the weakness member of the major indexes is the DJIA. A push back to the underbelly of the trend line around 120440 may be all we get on this index although I could see the 10500 area on emotion.
The real strength of late and what has me thinking that this market has that rally potential about it right now is that the NASDAQ is leading. That shows a shift of funds to the NASDAQ from the sectors and that is what usually leads a year end rally. The NASDAQ could rise another 50 points to the 2150 area and still be firmly within the down trend.
Which leads me to the SOX which is likely to be the heart of the NASDAQ rally if it does in fact lead us higher. If you look at the SOX, you see a big spike reversal that suggests higher prices could be in the offing (a near term bottom is in). This chart shows the potential to rally as high as 470 which is almost a 10% gain from the current levels. If that occurs, you can bet the other indexes will move higher. Add to it that the SOX held its 200 day moving average and it's up trending line. Those are all bullish and as long as this chart holds together, the rally mentality is going to be in tact.
Finally, look at the BKX which is the most important sector in the NYSE. Some back filling is expected near term but the break of the neckline I had drawn in did not lead to acceleration but instead a rally higher than it should have. That make me think that this head and shoulders pattern is likely not a valid one. Could still be but it's not as likely now. It's more likely just a large topping pattern that has a ways to go to fully play out. In the meantime, a push back to the down trend line around 100 is quite possible.
Given all the current evidence, the current thesis that I intend to trade with is the following. Expect a push back to the 1200-1205 area, another pullback to test the bulls that could be as shallow as 1192 and then a press back up through the 1200 area which should get the year end rally mentality really going. This could carry to the targets I've shown above and likely sets up another great shorting opportunity.
|Last Updated on Monday, 30 July 2007 04:09|