Market Analysis for Mar 23rd, 2004

Recovery Scenario Still in Gear
By Mike Paulenoff,

A very interesting day today in that both indices, the E-mini June Nasdaq and S&P, had rallies off of yesterday's low. Both of those rallies, especially in the S&P, exhibited bullish forms and peaked during the first hour trading. The peak in June S&P was 1100.25 and the peak in the Nasdaq was 1396, which pulled up just shy of our preferred highs for this first rally. Nonetheless, the rallies themselves argued to us that after a rest or pullback there would be another rally.

That's where it really gets interesting, because in the June Nasdaq the pullback turned out to be a plunge to a marginal new low of 1369 ,, which took out just by 2 points or so yesterday's low of 1371. From a strict technical perspective, the new low would invalidate the idea that we're going up from here.

However, the June S&P pulled back to a higher low than yesterday. It hit 1089.75 in mid-session, versus yesterday's low of 1087.50. The combination of that divergence -- the relative strength of the June S&P -- coupled with the inability of the relative strength gauges to confirm the new low in the Nasdaq suggests strongly to me that at least for the time being both indices are sold out or exhausted on the downside, at least ahead of another upleg in a recovery rally.

As we speak now, in fact, both indices have rallied off of their mid-day lows of 1089.75 in the June S&P and 1369.50 in the June Nasdaq, and right now as we speak we're at 1097 and 1383. So we've had substantial rallies. My work suggests those rallies are headed for new highs on the day above 1100 and above 1396 into targets that could be as high as 1108 and 1404-08.

So for now the recovery rally scenario is unfolding, maybe not exactly as mapped out before the opening this morning, but certainly is unfolding in a way that suggests for the time being the indices are sold out on the downside.

With regard to the QQQs, the Qs are trading similarly to the Nasdaq as always and as such the Qs plunged mid-session to 34.01, which was 2 cents beneath Monday's low at 34.03. Nonetheless, the same conditions prevailed in the Qs. That is, there was no downside follow-through beneath 34.01 and, that being the case, that serves as a minor bear trap, and now the Qs have rallied to 34.37.

My sense here from my work is the Qs are headed for a minimum of 34.45, which is a minor trendline from the end of last week. If 34.45 is taken out they will then take off, retest this morning high at 34.65, and my sense is from the work right now they'll take that out and go to somewhere around 34.80 at minimum and possibly as high 35.05.

As long as today's low at 34.01 contains any nasty plunge, then the recovery scenario is in gear and still dominant.

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