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The Morning Cup of Jo

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Be Comin' Round the Mountain when she comes...

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Welcome to the First 'Morning Cup of Jo.'

Given the last year's run up and most of the teletubbies singin', "How sweet it is to loved by you." - JT, I felt the first 'Jo' should focus on the overall markets' road signs (technical indicators). This might help us get a better understanding of just where the market (SPX) is sitting. Looking at the graph below you'll see 2 trend lines (Red and Blue). Red is what I consider to be short-term (ST) - starting November 21st of last year - and the blue is intermediate (IT); neither of which has yet to be broken. ST, from November to the latter ½ of January, the market has been in a parabolic move upwards (increasing price acceleration). One thing is certain, parabolic moves in the markets cannot be sustained forever and require a consolidation prior to continuing its current trend. The problem with this fact is not being able to know how long the move will last.

Now let's take a closer look...

WONDA Copyright 2004 William O'Neil + Co.,Inc. All rights reserved
I apologize about the chart -- Snapper's gonna help me get it more legible over the next couple of 'Jo's.'

One very important road sign I love to use has to do with momentum - The Stochastic. You'll see this on most of the graphs I'll be posting. Techies (market technicians) use this indicator in many different ways. In my opinion, keeping it simple always seems to provide the best results. Some techies follow the stochastic for crossovers. This is when the fast stochastic crosses the slow stochastic, believing that a change in direction is coming. I've found this can lead to many false positives. I use it for divergence purposes. Let me explain...

A Stochastic Divergence (SD) is when the market (or stock) has put in a top, pulls back and tries to breakout through the last high - which happened on 2/11. The divergence occurs when the stochastic (and most likely volume) do not exceed the prior attempt levels and the fast stochastic crosses back over the slow stochastic. In other words - the momentum on the second attempt to break into new highs is less - the market is loosing steam.

Besides the occurrence of an SD, the SPX looks as if it could be forming an ST Double Top. This pattern becomes complete when the neckline is broken. In this case, the neckline resides right at the 50-day moving average (1122). If this breaks, the next support could be the IT trend, (about 1100).

One note about road signs... they don't inform you that an actual event will occur, they only let you know what may possibly occur.

Hoofy's been Dancing between the elephants and Boo knows the markets are at a technical inflection point; but the question remains, "Who's gonna win?"

See ya on Buzz & Banter or until next time...

KAT

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No positions in stocks mentioned.

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