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The Morning Cup of Jo




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Good Morning and welcome back to Ollie's Diner for your morning cup of technical inspiration. However, I'm afraid your thirst for absolute clarity this morning might not be quenched with what I'm about to say. Before getting into all that, I'd like to rehash the last 3 'Jo's' for a reminder of what's been said about the markets.

On September 14th, the first time the SPX hit the 1130 resistance level; I presented an argument that the SPX may first see a pullback followed by a retest of that same level. This occurred in spades. The SPX pulled right back to its 50-DMA.

The following week, September 30th, the 'Jo' presented the theory that once the SPX retested resistance (1130) for the second time, "This is where the rubber will meet the road." The very next day it landed right back below resistance. If you remember, this was the day after the Merck (MRK: NYSE) debacle.

Last week, October 4th, I talked about how three other markets - The NYSE Composite, the S&P Mid-cap 400 and the S&P Small-cap 600 - all have broken above the neckline of positive patterns. Also talked about was the 1145-1150-resistance level of the SPX. Which brings us to where we are today.

Each of the prior articles incorporated a bullish slant toward the market. Today is somewhat different. Do not mistake, it's not too say I'm Bearish, it's only to let you know another road sign, I didn't anticipate, showed up while we were driving. This is something that has the possibility derail the latest breakout. Let me explain.

In the past articles I talked about the 1145 resistance level and a potential light volume pullback at that point to retest the 1130 level, if broken above. This would help give confirmation it was a true breakout. Nonetheless, the pullback has occurred on lighter relative volume. However, the volume is not at the forefront of issues today. The market didn't hold the 1130 level. Actually, this is also not the main point I'm trying to make. The issue that has been worrying Hoofy all weekend with the SPX, and many other indices for that matter, is they are starting to show the possibility of a (SD) stochastic divergent top.

WONDA Copyright 2004 William O'Neil + Co., INc. All right reserved

For absolute clarity, at least on this point, a SD Top is when the market hits a second relative high and momentum does not. The completion comes when the second stochastic cross happens. Currently it has not, but one or two more down days could push it through.

During an advancing market, especially one coming out of a recent base, it is not abnormal to see this occur. Where I believe the ball gets fumbled and Boo regains position is if the SPX busts back below its most recent bottom (1100).

Once again, this does NOT mean the SPX will fall back through its latest support (1100). But is a true warning sign to start being careful where you walk.

From a Bottom up perspective, and for the many techies who read these articles, another warning sign will come in if the most recent breakouts on individual equities start to fail. Keep your wits about you.

One last note... If the SPX does bust above its most recent high with better than average accumulation volume, I do believe we'll see a Q4 rally.

I hope this helped!

Until next time...


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