Market Analysis for Jan 27th, 2004

Head-Fake to the Downside?
By Mike Paulenoff,

It's been another interesting day. The E-mini March Nasdaq is now down 28 points, and it's about 30 points under the high. The E-mini March Nasdaq pattern is very interesting, because yesterday when the March S&P went to new highs, the Nasdaq did not. Yesterday's rally was from the 1520-23 area, from which it rocketed to 1557, but interestingly the 1557 level was not a new high. The high was made on January 20 at 1563.

So yesterday's rally fell short and has created a triple top right in the E-mini March Nasdaq within the past week at the 1557 level (it got up to 1557 , on the 21st and again on the 22nd), which in and of itself lies right below the January 20 high at 1563. So that's the top-side of the near-term pattern carved out in the E-mini March Nasdaq.

The bottom side of the pattern is also well defined. That's the 1525-21 area. That cluster of lows occurred since last Thursday, and just below that you have 1516-13. That level stretches back to the beginning of the month. That's the critical level, the line in the sand, which if broken will trigger a significant decline as well as a meaningful near-term sell signal, the first we've had in quite a while.

For me it will signal the conclusion of the December-January advance. So there is some significant downside if we do break and sustain below 1513. I think probably you're going down a minimum of 40 points to the 1470 area to start and beyond that to 1440.

What is the likelihood of a breakdown? As fate would have it, the range between 1557 and 1525 or so, having been traversed already today, appears to be getting oversold, according to our hour work. Not only that, the pattern carved out is part of a wedge pattern that I outlined in the last chart update on the Web site.

If it is a wedge or a triangle or a coil type of pattern that stretches back to the January 20 high, then we're almost finished with it, which means that it is a continuation pattern in the bull move off the January lows.

If that turns out to be correct, then with all this volatility in this range, this is all a bullish set-up for the E-mini Nasdaq and, as it turns out, the Qs to head-fake to the downside now but not to break down below key support levels like 1513 and in the Qs 37.60.

Instead those indices will hold right around current levels, the 1525 area, and reverse back up with some power and actually go to new highs.

As hard as that is to imagine, that's the way the pattern is being set up. All bets are off, though. If you break under 1521, that should take you to 1513, and we've discussed already what happens beneath that.

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