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The Morning Cup of Jo


Looking good Willis.


Trademark Pending

Ask and you shall receive - finally, a reversal day that held its ground and had the capacity to keep Boo in the closet for the duration of the day. Well, as the ole adage goes, "Never short a dull market." There's no two ways about it, yesterday the markets broke through their first level of resistance and started a countertrend rally. The volume wasn't that exciting, but on a relative basis (over the last couple of weeks) it was decent.

We've now officially seen the beginning stages of the bottoming process. {A bottom, a bounce, a base, a bottom and divergence, although selective (which I'll cover below)} This combined with all the technically oversold indicators...

{The A/D line -- Arms index -- Put/Call ratio -- 10-DMA new highs crossing below 10-DMA new lows --percentage of Nasdaq volume versus NYSE volume declining -- lowest percentage of shorts held by specialists in over 2-years (<25%) -- % of Bulls vs. Bears}

.... gives a really good case for a longer-term scenario. However, there is still much work to do. In the May 13th 'Jo' I discussed this very issue and how there has to be confirmation after the 4 B's and a D. (Please review for a picture perfect example.) Therefore, it's now time to determine whether this will be just a short countertrend rally or if it's part of a longer-term move and the markets have finished their first true corrective move since the March '03 Bottom.

Let's take a look...

The Nasdaq

This chart is the most telling of all three sisters. The main reason is because of a full divergence happening on both the momentum and volume. You'll notice the Stochastic and the MACD, which just crossed over, are both showing higher bottoms as the price presented a second bottom lower than the first bottom in March. Also, on the second bottom, the volume declined as the prices broke to new lows.

This index is currently sitting just below another converging ST resistance level right at its 50-DMA (1,970). Breaking this, hopefully with volume, would give the index a clear shot at the ST down-trend line just above.

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


The SPX isn't as attractive. Notice the only momentum divergence is on the Stochastic and the volume showed an increase in distribution as it was hitting the second bottom. Normally second bottoms, if true bottoms, show less volume giving an indication selling is subsiding.

This index is also sitting just below converging resistance at its 50-DMA (1,117). Again, breaking this level should bring this index up to the ST downtrend line.

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

The Dow

This index, if this is a true bottom, must be Cinderella. Nothing looks good on this one. No momentum divergence and an increase in distribution as it broke new lows. Next resistance is at the 50-DMA (10,250).

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

At this time, to put this all together in a nice neat wrapper, the markets need a confirmation follow-through day. This is a day, which should happen within the next trading week, where the markets increase substantially, break a major resistance point and have 15-20% increase in trading volume.

I hope this helps.

Until next time...


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