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The Morning Cup of Jo


I'm on the eighteenth and I can see the Flag!


Trademark Pending

To begin our trading week the Nasdaq continues to rest on the 1900 level and the SPX is still trading above its 200-DMA. The Dow, on the other hand, has been building a very decipherable negative technical pattern - a Bearish Flag Pattern. Even though the pattern is not yet complete, many techies like to see this particular road sign because of its simplistic formation and reliable predictability.

Taking a look at the Dow graph below you'll notice the flag portion of the pattern is outlined with two slightly upward-sloping light-green channel lines. This portion is traditionally built with drifting volume following a sharp increase in negative volume (distribution) which formed the pole.

The pole, or mast, is somewhat hidden by the red double arrowed line just prior. I put this on the graph to show the length of the pole and its potential corresponding meaning. Once this pattern is complete, breaking the bottom side of the flag, the historic predictability shows a potential move of the same length as the pole. This is why flag patterns, whether bullish or bearish, are utilized by techies to help determine when half of the overall move has taken place. If this assumption is correct, this move could bring the Dow down to 9,225 on its next trend break.

On a side note, you'll also notice how the Dow is still trading below the Floors & Ceilings (black line) and its 200-DMA (thicker blue curved line).

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

With the possibilities of a market bounce looming just around the corner the short-term movement is still unclear at best. However, the longer-term technical health continues to deteriorate. Relating back to last Thursday's 'Jo,' and the probability of a self-fulfilling prophecy, it is becoming incredibly disheartening to see the markets in such a technically oversold condition and not be able to muster up enough steam to even get a solid bounce. Traditionally, when this type of rare action occurs, it spells out one of two things.

1] A complete longer-term trend reversal
2] A ferocious and violent sell off when the final straw is broken

Nonetheless, a break above 10,100 on the Dow, 1,105 on the SPX and/or 1,950 on the Nasdaq would finally give some credence to a short-term rally ensuing.

I hope this helps.

Until next time...


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No positions in stocks mentioned.

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