Friday, March 25, 2005

Review of the Big Boys

To get back into the swing of things, let's take a look at what the markets, in general, are doing. To accomplish this task I have included the charts of the DJ Composite, DJ Industrials, DJ Transports, DJ Utilities, S&P 500, Nasdaq, and Nasdaq 100.

Once again, I would like to reiterate that these markets are very tricky right now to gauge. We are at a turning point, and no one is really sure which way the markets will go, but many people have their guesses. You must remember that there is always one entity that is 100% correct, and that entity is known as "Mr. Market".

Shall we see what he has to say?

Click to Enlarge DJA Weekly View Posted by Hello

The first chart here is the weekly chart of the Dow Jones Composite. You can see that the DJA broke out on that last burst upwards at the beginning of March. This break helped me get more bullish on this composite and some of the other DJ's. Then, it seemed that the move was a false breakout as it headed back down below that resistance level. You will notice, however, that the DJA seems to be at the uptrend line that has been intact for a few months now. This causes me to be more bullish then bearish at this point.

The above opinion is just taking the price action into consideration. Now, let's take a look at the bearish divergence between the RSI, Stochastics, and the price. You will see that the DJA made a new high, but both the RSI and Stochastics did not follow suit. This is bearish action.

I would be very careful in looking for new long-term investments. How prophetic, huh?

Click to Enlarge DJIA Weekly Chart Posted by Hello

This next chart is of the Dow Jones Industrial Average, which is the most followed of the DJ's. The DJIA also experienced a breakout at the beginning of March. The DJIA has also come back down from that break of resistance showing a false breakout. On the bullish side, the 50-Week Moving Average is where the DJIA found support last time. I don't think I'm going to get that bearish until the DJIA breaks below the 10,320 level. Remember a downtrend has to be a lower low and a lower high. We haven't gotten either yet in the DJIA.

On a bearish note, the DJIA is also experiencing the bearish divergence between the RSI, Stochastics, and price. This is usually a telling sign. I would still wait for a break of the 10,320 level to get bearish.

Click to Enlarge DJT Weekly Chart Posted by Hello

Now we've got the DJ Transports to look at. The Transports did make a new higher high for the year, but failed to breakout of the long-term resistance level. Having the Transports continue to increase while oil keeps rising is beyond me. Find the trend that can't continue and bet against it as George Soros would say.

You will have to note the bearish divergence here as well. Also note the continuing uptrend line that began in 2003.

Click to Enlarge DJU Weekly Chart Posted by Hello

Above is a "busier" chart of the DJ Utilities. You can see that the Utilities didn't break above the extremely long-term resistance level. The Utilities are also experiencing the bearish divergence, but there are many support levels below as you can see.

So, I wouldn't be putting any long-term buys in anytime soon if the stock is on one of the DJ's. If you do, you would have to be highly selective and very knowledgeable. This market isn't easy...that's for sure.

Click to Enlarge SP500 Weekly Chart Posted by Hello

Here we have a weekly chart of the S&P 500. The S&P 500 hinted to a breakout for the DJ's by breaking out much earlier at the beginning of the year. The breakout occurred after the bullish flag formation. The new support for the S&P 500 is around the 1155 level. I will not get bearish on this index until the new support line has been breached.

The breach of the new support line could happen, though. The S&P 500 is also experiencing the same bearish divergence between the RSI, Stochastic, and price that the DJ's are experiencing. I need to let you know that this occurrence and any occurrence that appears on a weekly chart is much more powerful than if it were to appear on a daily chart.

So, I am not bearish yet and will not be until the new support level is broken. This could happen due to the bearish divergence.

Click to Enlarge IXIC Weekly Posted by Hello

Almost last, but not least is the Nasdaq Composite Index. Here is where I break the broken record. The Nasdaq is actually close to it's support level. The IXIC has been forming this consolidation pattern for a few years now. I'm very excited to see which way this consolidation is going to break. It should be very interesting.

The Nasdaq is extremely oversold according to the stochastics and should bounce off of this uptrending support line. This could be a good spot for traders to get long. Between the resistance at around 2200 and the support at around 1990 is 10.5%. A leveraged trader could get 21% or more out of this next move. I would have much different advice for a long-term investor (Wait for a break of the consolidation).

Click to Enlarge Nasdaq 100 Weekly Posted by Hello

Lastly, we have a weekly chart of the Nasdaq 100. This index broke above resistance at the beginning of November 2004. The Nasdaq 100 is now at this new support level and is also very oversold according to the stochastic. Traders might be able to find some gems within the components of the Nasdaq 100...take a gander.

In summary, I am not bearish, but I could be soon according to the charts. I would not be looking for any long-term investments right now except in very special cases. If you are a trader, it is a different story. A trader has no problem getting in and out of positions. A long-term investor is wired differently...they don't feel comfortable with frequent trading. If you can do both, that is great.

Let me know your thoughts on the markets. A dialogue between readers and blogger would be much welcomed and appreciated.

Best Regards,

The Soothsayer of Omaha


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