Market Analysis for Jan 21st, 2004

Recovery Rally and Nothing More...Yet
By Mike Paulenoff,

For the first time in a while the indices are having a two-way market, in which case the bears seem to have a little more muscle than they had previously, especially in the Nasdaq side. The Nasdaq is the weak one today, obviously largely because of the earnings that the Street either was disappointed by or decided to sell into.

The Nasdaq E-mini is down 13 points, whereas the S&P is up 3 points. Looking at the weak index, where the bears are having a bit of success in keeping the market in at least a stair-step decline: Yesterday's high was 1563. You had a stair-step down from yesterday's high in the morning. The first step down was to a low of 1542 , yesterday morning, and then there was a rally to about 1560. Then you stair-stepped down again, broke yesterday's low this morning, and went down to 1530. That's 30 points or so below the high from yesterday, the all-time recovery high.

Since this morning's low at 1530 ,, though, the E-mini Nasdaq has stair-stepped back up to the 1540-42 area. That's important because when it broke 1540 on the way down this morning, it broke below its January trendline. Now it has recovered back to the extension of that trendline, at about 1542.

So the way I look at it is right now it's a recovery rally and nothing more. It's not as of this moment the beginning of a new up-leg.

However, if it breaks above 1545, then we have to give the benefit of the doubt to the bulls again that more upside is ahead, and that while we've had a pullback, that pullback is only just that and it's not the beginning of a significant period of weakening prices.

If the index goes down below 1530 then we would have reason to suggest this leg down has broken a low and in fact is keeping the bears in control. Our next downside target would be 1524.

To confirm that the bull move from December-January is complete, the E-mini Nasdaq would have to break below a series of lows from mid-January at 1516-14. If that area goes, then the entire period from around January 9 through now would constitute a near-term top to the December-January advance and things would get very interesting indeed. But that hasn't happened yet.

As for the QQQs, they are trading similarly to the Nasdaq, as always, and tried to do some damage to their near-term chart pattern today. They have the same stair-step decline from yesterday's high at 38.85 to this morning's low at 38. However, the Qs really need to stay below an area between 38.30 and 38.40. If they stay beneath that area, then there's a good chance they'll roll over and retest today's low at 38.

If not, if the index takes out 38.40, then I think we're going to take off just like the S&P did and revisit the highs and probably make new highs, and our next upside target in that event would be 38.95 to 39.20.

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