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The Morning Cup of Jo


I can Stop ya once, I can Stop ya again!


Trademark Pending

Yesterday Hoofy woke up and had it in him that today was going to be the day! He believed he was blowin' enough steam to lead the charge. Right out of the gates the SPX, within the first hour of trading, was going right up to resistance (1,150). Everything looked good, for a while. Snapper and his friends were already planning a trip to Terrapin Station. The markets consolidated for about 2 hours before Hoofy could make a second charge toward the ever present resistance levels. Then POW, 2:30 came with a news release across the tape stating ½ dozen explosions occurred in Damascus - terrorists. Boo said, "Sit down Hoof, it's my turn." And the SPX and Nasdaq closed toward the lows of the day.

However good things started out looking, yesterday was almost curious while it was making its attempt at resistance. Something just wasn't right. There were only a few select secondary indices pushing higher. In my experience, most times the markets are about to blow through a resistance level, the majority of secondary indices are involved - not just a select few. Then it dawned on me, what Toddo said in his "Twenty Questions" article yesterday. "Will the banks and semis have to lead any attempt at upside acne?" With 22% of the SPX weighted in Financials and the technology laden Nasdaq, it can't only be the Healthcare, Oil and Biotechs that push the markets through a major resistance level. It has to be a collective effort on all parts, or at least a majority.

That being said, let's take a look at the two imperative secondary indices.

The PHLX Bank Index (BKX), on 4/14/04, broke through the neckline of a Head & Shoulders Top pattern at 98. Since then the index has been flirting with its 200 DMA. Yesterday it pushed right up against the bottom side of the neckline (now resistance) and failed to make any further progress.

Before continuing onto the SOX I'd like to point out another nuance about breaking patterns. Many times techies look at a pattern that is broken and attempt to guesstimate where the next support/resistance will be. A good rule of thumb to use - not to assume this is always accurate - is taking the height of the pattern and subtracting it from the break. In this example the Head reached a level of 103 and the neckline is 98, which is a difference of 5. Take that number and subtract it from the neckline and you get 92. Fascinating how that corresponds to the next level of horizontal support.

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

The SOX is somewhat more startling. Here there's some good news, and then some bad news. The good news is that it's sitting on converging support and its 200 DMA. The bad news is, it's at the end of a 2 Headed Monster. If this neckline is broken it could potentially spell out a very rough road ahead for the Nasdaq. Just keep this in the back of your mind - the greater the support level, when broken, the greater the potential carnage.

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

Now that I've set fear in your hearts, remember, these are just road signs and nothing's set in stone. Like was said yesterday on Buzz and Banter, "Technical Analysis is only one of the primary metrics that drive the market."

I hope this helps.

Until next time...


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No positions in stocks mentioned.

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