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The Morning Cup of Jo


I saw it comin' but didn't wanna believe it.


Trademark Pending

Last week's action was most certainly a continuation of technical devastation for all the markets and, at this juncture, the probabilities lean toward additional downside encounters. Presently the Dow, SPX, Nasdaq and Russell 2000 are ALL trading below their IT Trends initiated back in March of 2003. All that's left for Hoofy and his friends is the hope of some horizontal support, set in place back in early March, and one very small, yet stirring, possibility I'll talk about in a minute.

Since this consolidation started, back in late February, the 'Jo' and many of the other professors have covered the secondary indices and their correspondence to the overall markets' technical condition. Just look at how many times Toddo talks about Citigroup (C: NYSE) and its relation to the financial index, hence the market in general. Since that point, fewer and fewer secondary indices have been technically supporting the majors and at the moment a Techie would be hard pressed to find any that show, what we consider to be, good positive technical action.

Secondary Market Indices

On Thursday the RLX (S&P Retail Index) and XTC (AMEX N. American Telecom Index) - two of the few secondary markets that were still holding - finally gave up their converging IT trends and horizontal supports. Now the RLX is sitting just above its 200 DMA and the XTC looks as if it could freefall as much as 10% before hitting its next support level.

The HGX (PHLX Housing Index) also just broke horizontal support and is currently sitting just above its 200 DMA (348) - a break here could drop the sector down to next horizontal support of approximately 300.

The BKX (PHLX Bank Index) and the XBD (AMEX Broker/Dealer Index) broke both another small consolidation and their 200 DMAs. As I talked about in a prior 'Jo,' the next level of support for the BKX is around 91.75-92. If it's unable to hold there, it could bring the index down to 85 - an additional 8%.

As a final point, on the breaking side, The DJ Transportation Index dropped below its 200 DMA and could be headed for the March lows. This is not good for the Dow Theorists.

In the "Close, but no Cigar" category is the Dow Utility Index. This index completed a stochastic divergence in early April and is just barley sitting on its converging IT trend and horizontal support. A break here could drop the index down to 255 (below the 200 DMA)

Another of "The few, the proud, the above IT trend" is the BTK (AMEX Biotechnology Index). It currently resides just above horizontal support - Floors & Ceilings - and 200 DMA at 490 - 500. If this index breaks it could also lead to a 7-10% drop down to 450.

Last but certainly not least - as far as the Nasdaq secondary markets are concerned - in the sole survivor category is the IIX (AMEX Internet Index). It's positioned just above its ST trend and horizontal support (140). The technical damage, assuming a support failure, could drop the index as much as 20 points.

Major Indices

Russell 2000

On Friday the Russell 2000, which I would consider had the best overall technical condition, gave it up. It has been trading in a price channel since the beginning of the year and ultimately gave in to the pressure of the other majors. I wouldn't be surprised to see this index hit as low as 480 if it gives up the 200 DMA (544).

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


The Nasdaq, as we have talked about multiple times, broke its IT trend back in early March. On Friday it broke its 200 DMA for the second time within a week and looks as if it will be challenging the horizontal support from early March.

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


The Dow is a new addition to the list of "Breaking the IT Trend." As you can see it broke through the downside of a large wedge formation on higher than average volume. The next support is 10,000. I think this is the first time since the Dow first crossed that mark back in April of 1999, it's had any real technical significance.

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


The S&P 500 looks very similar in the fact it has also broken through the downside of a large wedge formation and has some underlying support at the March low (1,087).

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

I mentioned at the end of the first paragraph a possibility looming, yet small, for Hoofy and his friends. The last three graphs above - Nasdaq, Dow and SPX - all show horizontal support levels just a blink away. If, a big IF, these indices test, or drop just below, the March lows, hold and turn back up without the momentum indicators hitting new lows (a higher bottom than the March lows) there could the possibility for momentum divergence.

Maybe, just maybe, with the TOPIX down almost 6%, the Nikkei almost down 5% and the rest of the other Major World Indices down on average 2.5% (just an estimation) this will wring out enough complacency in our markets to find a relative bottom. Only time can tell. For now, hold on tight. Today's gonna be a fun one.

I hope this helped.

Until next time...


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