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The Morning Cup of Jo


Go Baby, Go Baby, Go!!


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Yesterday A.M. on B.B. (Buzz & Banter) Toddo put out... "According to Phil Erlanger, long-term support for the NDX is 1160, or 20% below current levels." For those of you who aren't aware, Phil Erlanger is one of the foremost and widely listened to technicians on Wall Street. After reading the excerpt on B.B. I thought it imperative Minyans see where the number comes from and what has to occur prior to this coming to fruition. The MLT (mega-long-term) graphs below are by no means to be construed as if I personally believe all trend lines will be retested and/or broke. They are merely to point out different support levels in the three majors. I agree with Phil Erlanger's opinion, it is MLT support, but once again, it doesn't necessarily mean the markets are going down to test and/or break them.

All three graphs below date back prior to Black Monday in 1987 and have 2 different sets of trend lines (Green and Red). I've done this to point out separate inflection points within the MLT graphs. Also, I have used logarithmic calculations instead of arithmetic. When looking at MLT it's much easier to see the trends on a percentage basis verses a point basis. Before continuing, consider yourself forewarned, this is not pretty.

"WARNING - if you have small children, you may want to ask them to leave the room."

All kidding aside, let's start with the NDX, dating back to 1985. The two green lines represent the most recent Floors and Ceilings and the LT up-trend conjoining point, (i.e. the 1160 support level quoted by Phil Erlanger). Floors & Ceilings usually require 4 points. The horizontal line hits one ceiling in '97, a floor in '98, a floor in '01 and a ceiling in late '02. All within the same approximate level (1,100-1,160). Now take a look at the green up-trend line. This is where, once the H&S top was broken and the NDX started its freefall, it found support. This is where it starts to get ugly. Let's assume for one second, the horizontal support of 1,100-1,160 doesn't hold, if it retests it again. The next major conjoining trend line point is 800 (the red "Let's Hope Not" level). That's 45% down from here. I won't even discuss what it would look like if we broke that line. "Nightmare on Minyanville's Main Street."

WONDA Copyright 2004 William O'Neil + Co., Inc. All rights reserved

Onto the Dow; the best looking MLT chart of all. Not only did this index hold the horizontal support dating back to 1997, it's broken upward of its downtrend since 1999. Like most trend lines, there is a high probability, not to say it will, the Dow could pullback and retest that line. If so, it could be somewhere in the 9,200 range (11.5% from here).

WONDA Copyright 2004 William O'Neil + Co., Inc. All rights reserved

Now for the finale - the ugliest of all three sisters - the SPX. Let's start with the Red lines. At this particular moment in time the SPX is sitting right underneath 3 converging resistance points - not good - one being horizontal and 2 inclining. Let me diverge for a second. Yesterday, again on B.B., Toddo asked me a question about a ST (short-term) inverted Head & Shoulder pattern forming in the NDX and SPX. I answered, "Yes, you're absolutely correct. However, if the markets decide to break to the upside it had better be on massive relative volume." This chart is exactly why. It's gonna take a lot of steam to get this train to leave the station.

If the SPX decides to consolidate, prior to attempting a bust upward, there are 2 technical possibilities. One is a smaller retracement (not shown on the graph - would have been too confusing) down to the monthly closing low in 2001 (1,040). This would form an IT inverted H&S pattern - gotta use your imagination for that one. However, if the SPX decides to have a deeper consolidation, the 2 converging support points looks more feasible (920 or 10%).

WONDA Copyright 2004 William O'Neil + Co., Inc. All rights reserved

Now that many of you have lost your appetite, I'd like to make this one last statement. Looking at MLT charts is very important when approaching inflection points. Nonetheless, there have to be many shorter-term moves on the way to these levels that could give a clearer picture of the markets' overall health. If anyone, and I mean anyone, tells you points on MLT charts that the markets are going to hit over a certain period of time, give me their name because I'm always looking for a good psychic.

I hope this helps!

Until Next time...


No positions in stocks mentioned.

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