Market Analysis for Jan 29th, 2004

Downside Move a Significant Technical Event
By Mike Paulenoff,

Today's action is very interesting. There's carryover follow-through selling pressure from yesterday. People are not interested in buying any stock right now, or there are very few green up arrows on anyone's screen, and that spans all the different sectors, which suggests that yesterday's announcement from the Fed was either a good excuse for people to sell or the warning had the intended effect. That is, if Greenspan felt as though he recognized this bubble, whereas he failed to recognize the bubble in 2000, and was not prepared to allow it to go further.

One wonders from a technical perspective how much damage this sell-off will inflict on the charts. On a daily basis, which we posted last night to our E-mini site, the indices had basically smacked through tendlines, through near-term support, and were resting, in the case of the E-mini S&P, on the 20-day moving average around the 1126-27. Well, we've taken that out today, so we've taken out the rising 20-day moving average.

What's interesting about that is that the last time the E-mini March S&P was trading below the 20-day moving average was on November 17. Since that time, it proceeded to go to the November 21 low at 1030, which was the low against the 50-day moving average, and the market took off. So this is the first time since late November that the 20-day moving average has failed to support a pullback. That is a significant technical event, and suggests that there's more selling pressure to come.

Where's that selling pressure going? The key level for the E-mini March S&P is that January 13 pivot low at 1113.75. That's the next target. If you are short, we see the window of prospective buying interest coming in anywhere from 1118 to 1114. However, if the damage done by the Fed yesterday causes much more pruning that we currently are experiencing, then the E-mini March S&P will take out 1113.75 and will then go probably got to 1090-95. That would be the secondary lower target.

What could contain the damage? Frankly, I don't see a whole lot at this moment. In fact, tomorrow being Friday, we could have some pretty acute selling pressure into tomorrow's close if people get cold feet going into the weekend.

In any event, as far as what signal we would use that would indicate the bears have lost control and the bulls taken it back, that would only occur on a rally above 1129 in the E-mini March S&P.

Going over to the QQQs, they broke yesterday at 37.70, and accelerated via the Fed's comments. The measured downside target for the Qs is 36.60, and as we speak they're trading at 36.68-.67, so we're right in the area for a prospective target low in the Qs.

That's not to say the Qs have to stop there. If the Qs do not hold at the 36.60 area, then I think you'll have an immediate follow-through to 36.30-.35. That area coincides with an up-gap on January 2 that has yet to be filled.

So it's a good possibility that before this current down-leg sees any buying interest, we'll be down at 36.30-.35 before that happens.

What would cause me to reassess the strength of the downside for the Qs? For starters, I think a rally that sustains above 37.04 in the Qs would be my first warning. But a rally that takes out 37.32 in the Qs would be a confirmation that the bears have lost the ball and now the bulls are in control again, at least from a micro trading trend perspective.

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