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The Morning Cup of Jo


Tickles, You're Back! Good to see ya sweety.


Trademark Pending

Good morning and welcome to the first 'Jo' for the second half of '04. I hope everyone had an excellent 4th holiday. It's been some time since I've written and I apologize for that. It's been a little crazy around Church Street Capital over the last month. The good news is we're finally moved and have settled into our new suite. Thank God, there is nothing I dread more than moving - at least it was within the same building. If any of you ever get to Orlando please don't hesitate to pop in and say Hi.

On to the goings-on of the markets...

Since it's been a few weeks, Sammy felt it apropos I show some trend line analysis of the SPX and Nasdaq, where most of the action, or should I say non-action, has been taking place.

The graph of the SPX shows the resistance level the market has been grappling with since late January. On June 23rd Hoofy tried to bust through the downward sloping trend lines, but with no avail - Boo stepped in again and quashed the move. For a while there, it almost looked as if we were going to get an inverted two-headed monster. However, it became nothing more than a False Breakout. When the SPX attempted its break there was no relative volume present and was also showing a potential stochastic divergence (less momentum as the market was attempting a higher level). This came to be the 2nd stochastic divergence since the March '03 lows. Not a good sign. As obvious as it may seem now, the about-face over the last 2 weeks was technically expected. You could tell this by Boo sippin' martini's poolside - no worries - and Hoofy tellin' Daisy to stop her frivolous spending the day it happened. This false breakout was an excellent, below average risk, short opportunity.

As for now, Boo's back in charge. The SPX retraced back below its 50-dma (Day Moving Average) and has been increasing its distribution (selling) volume. As you may remember, and can see, this was the only index out of the three sisters (Dow, SPX and Nasdaq) to hold the 200-dma back in May. We will soon see if this will be the case again. If not, I believe this will spell serious trouble for the later half of '04, regardless of the election hype. Hoofy and Snapper will be back to taking long lunch hours at the track and Boo will be drivin' a new Hummer.

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

As for the Nasdaq, things are apparently somewhat worse. Like the SPX, the last attempt at resistance also failed, also showed a stochastic divergence and also had rather light relative volume. You can actually see Hoofy and his brethren's conviction (accumulation volume) in the Nasdaq has been declining since the January high. However, there are two other factors that make this index more troubling technically.

First is the negative crossover. The 50-dma has crossed below the 200-dma for the first time since the positive crossover back in March of '03. Second is the A/D (advance/decline) line. Notice the BIG BLUE ARROW pointing in a downward slope. As the Nasdaq attempted its breakout, this line also showed divergence. In other words, when the market was attempting to pass through the same price level, the amount of stocks pushing the market higher was less. (Only some of the bulls were let out of the corral.) This is typical of a topping market. Once, or if, the larger cap Nasdaq stocks give in, this line will accelerate its deterioration. Once again, not a sign of a healthy market.

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

Needless to say, this tape has been very difficult to navigate. Sammy's got himself all-a-twist and most equity breakouts over the last month have, and are currently, running into serious trouble. The Finance and Banking sector, one of the largest components of the SPX, and the Semiconductor sector, one of the largest components of the Nasdaq, are about to break serious support levels. Without them it'll be like running a Yugo in the Pepsi 400 - it just ain't gonna fly. We at Minyanville realize that piloting your investments through this rocky tape over the last 2 quarters has been particularly hairy. This is precisely why we're here.

Remember what Toddo said in his piece called "Give yourself a hand." "When I explain Minyanville to people, I talk about the need to build a syndicate - a network - that will surround us with good, honest and forthright people who watch each other's back. The isolationists who try to go it alone aren't doomed but they're certainly operating at a disadvantage. We're gonna need all the help we can get and the sooner we understand where we are, that better we'll be able to prepare for where we're going."

When the markets are at a point of inflection, as they've been, this is normally the case. As I spelled out in the last 'Jo,' we are no longer in a market where buy and hold will suffice. It's time to change that "Straight Line Thinkin'." The current environment is only conducive to trading and will continue to be so until the markets give technical confirmation one way or the other.

To recap; the majority of the damage is yet to be done if the markets break old support levels. Keep a watchful eye on the SPX's 200-dma (1,100) and the prior low on the Nasdaq (1,865). Also, you may want to keep your eye on Citigroup (C: NYSE) - Todd's favorite 'tell' - and Intel (INTC: NASD). This will give you a bottom-up approach to watching the markets. They are the two key - and largest - components in the prior mentioned sectors. If 'C' breaks $44.80 and 'INTC' breaks $25.60, this will be a "tell" to the markets overall action. Technically speaking, Citigroup is forming a large Head & Shoulder top and Intel is forming a massive inverted Cup and Handle. Take a look.

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

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

I hope this helped.

On a side note... Many of you have asked about the Dow 100 Year chart prior to my disappearance It is currently in the works and we should have something for you very soon. Thanks for your patience.

Until next time...


No positions in stocks mentioned.

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