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The Morning Cup of Jo


Why run when you can walk?


Friday night ended up being quite a party with Snapper blowin' the sax at Minyanville's Birdland. All the critters were whoopin' it up, for the word on the Street is - "Hoofy's back in town!"

The lights were dim,
the volume high,
Boo sat at the bar,
sippin' martinis with Sky.

Sammy came up,
said, "Don't feel so bad.
It's not over yet.
So don't be so mad."

Sammy, being the wisest in The 'Ville, tended to agree with Boo this time around - all this partying for one good day. Boo turned to Sammy and said, with an irritated look on his face and the martini at his lips, "What's-a-matter with these critters? You'd think they all just won the Powerball or somethin'." Sammy's very level-headed and wise - probably the wisest in town - and with his methodical scrutiny he reminded Boo that one good lap doesn't make a race.

Trademark Pending

No matter how Boo and Sammy want to look at it, Friday was a banner day for the markets as they all rebounded strongly and closed back above their 50DMA's. Even though the volume trailed off in the afternoon session, it came in strong on all major indices, especially the Nasdaq. (1.64 Bill on NYSE, 2.21 Bill on Nasdaq and 783 Mill on the Russell 2000 small cap)

The Nasdaq "Jumped the Creek" and broke back above its ST (short-term) downtrend (red in graph below) and stopped right as it converged with the 11-month up trend's floor (blue). However, it's very probable over the next week it will pullback to fill the gap. I've drawn in two other lines (black) that we'll revisit at the end of this 'Jo.'

WONDA Copyright 2004 William On'Neiil+Co., Inc. All rights reserved

The SPX, also breaking above its 50DMA, is approaching the bottom side of its ST downtrend. There's still some more room before it retests the floor of its 11-month downtrend, but one day could resolve this issue.

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

The Russell 2000 small-cap index has never really pulled back from the stratosphere. It's only consolidated about 7.5% over the last 4-weeks and Friday it closed at a 2-year high. If it closes above 615, within the next few days, it'll be at an ALL TIME new high, which makes it the only major index to be trading back above the peek set in place before the Big Bear market.

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

There're a million different scenarios that could play out here. The key to being able to trade the next major move successfully is by listening to what the markets are telling you. The only way to accomplish this, with shrewd confidence, is to follow the road signs, derive what may play out and make sure your decision is sound.

On all three graphs above you'll notice the start of a technical pattern I've outlined. If you haven't already guessed, it's a neckline, left shoulder and a head. The only section missing is a right shoulder. This is one of the most powerful and reliable technical patterns.

Scroll back up and play this thought out for a second. If (the BIGGEST 2 letter word in the English language) the Nasdaq pulls back (on lighter volume) to fill the gap, consolidates for about a week, you have a right shoulder. Or, think about this... What if the SPX, following suit, has another good day, hits the neckline, consolidates back down and retests its 50DMA. Voila' - another shoulder. Now how about the Russell 2K. This is at the neckline now. A lighter volume pullback does the same and will put three indexes in confirmation together. Isn't that what sweet dreams are made of?

Now for the other news -- Boo's news. There are some concerns at this point. The Financials, Banks and Broker/Dealers. They make up a substantial portion of the SPX index. All three of these indices not only took a bath on Friday, they came in with some pretty poor technical patterns. Without them it'll be a rough ride trying to get back above the neckline.

This is only one of many different scenarios that could play out. However, if you're not prepared for what could potentially happen, you'll be left in the dust and, very soon, end up holding the bag. Opportunities within consolidations only come by once in a while - make the best of it.

Hoofy, after getting rid of his Saturday morning hangover, probably spent the rest of the weekend scrolling through many different equities to seek out which sectors could be the first out of the gate. Hence, taking advantage of any positive technical moves and/or breakouts.

I hope this helps!

Until next time...


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No positions in stocks mentioned.

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