Market Analysis for May 12th, 2004

More Downside to Come
By Mike Paulenoff,

The overnight market held up pretty well, and based on the way the patterns were setting up overnight after yesterday's Cisco rally, it looked like they were in consolidation/flag type of patterns off of Monday's lows. In fact, though, neither index was able to make much headway above yesterday's highs, and instead fell apart.

I posted the long-term crude oil chart for my subscribers today, because it seems that there is definitely an inverse relationship now (whether because the press is manufacturing it or not, I don't know) between crude oil and the direction of equities. The higher crude oil goes (it's almost at $41 a barrel) the more pressure there will probably be on equities.

How you take advantage of that in equities is a whole different ballgame, but from a directional play there's an inverse relationship that's developed, and it's getting more acute as crude oil prices rally. So based on what I sent out to subscribers, if crude oil does move to the $43 or $45 barrel level very quickly, or higher, just based on technicals and not on geopolitical events then the equity markets could break some very important levels.

Those important levels are the following. Based on the E-Mini June Nasdaq, you're approaching critical support along the Nov 2003/March 2004 support area, which is 1365/63. That's the equivalent of $34-33.95 in the QQQs. If that level is broken, it should unleash more serious downside liquidation than we've seen so far. In the E-mini June Nasdaq, we could probably go down to anywhere from 1360 down 100 points to 1250 or so. In the Qs we could go down to 32, may be 31, based on the breakdown from that support.

So, in other words, support levels at 1365 in the E-mini June Nasdaq and at 34 in the Qs represent the neckline of a huge top pattern that goes back eight months, and that's nothing to ignore.

What makes it even more acute at this point is that you have rising crude oil price and the threat of rising interest rates, and in fact you have the backing up of the long end of the market because of the auction. So there's a confluence of fundamental events that is playing into the hands of downside in equities and it's just exacerbated by the crude oil market.

So there's more downside ahead. Looking at today's ranges, in the E-mini June Nasdaq you have a high of 1423. Anything that happens that takes prices back above 1423 will be considered a reversal and the end of this downleg.

In the E-mini June S&P, you have a high today of 1094.75. Anything that gets above 1095 in the E-mini June S&P will be considered a key reversal and indicative of the end of this decline for whatever reason.

In the Qs, basically we'll use 35.40. Anything that gets prices above there will at least neutralize the current downmove.

Finally if the downside does continue -- and it's giving every indication of suggesting it will -- in the final hour of trading if we close at or near the lows, there could be a set-up for a very bearish Thursday morning. That is, a gap down, unwinding, and if we break the levels mentioned earlier from those eight-month support levels and we gap down below them tomorrow, then there'll be some serious liquidation and you could see an unwinding, the likes of which we have not seen in a long, long time.

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