Market Analysis for May 18th, 2004

Watching for a Peak and Downside Pivot
By Mike Paulenoff,

It's obvious we're in our second day of countertrend rally. I say countertrend because the patterns that have been carved out by both the E-mini S&P and E-mini Nasdaq and the Qs for that matter do not inspire me to consider the rally the beginning of a new upleg.

In the recent past we've seen recovery rallies that have been very potent and that are indeed things to stand in front of. By comparison, the rally we're having today is not along the same magnitude of those explosive rallies from last week and the week before, rallies by the way which failed in the end and gave way to new downlegs that went to new lows.

In any event, where do we go from here? The E-mini June S&P is basically in a coil/sideways range which has bookends on the low side at 1078-75 and on the high side at 1100 to 1103. Whichever side of the range is broken first would argue for a thrust in that direction. Right now we're headed towards the top of the channel at 1092, but it doesn't seem to be all that potent in this part of the advance, from 1080 yesterday to 1092 so far today.

So my work is telling me to look for a peak somewhere in the 1095-1100 area in the E-mini June S&P, at which point we should have a peak and a pivot downside reversal that inaugurates a new downleg. And if my work is correct, then the new downleg will break last week's lows at 1075.25 and move to new lows into our next target area around 1050.

Keep in mind that the most important aspect of such a move would be that a break of 1077 would break the 200-day moving average, after it has been tested three times in the last six sessions. So we'll be watching for that.

Only an upside penetration and sustained move above 1103-04 would argue we have a bottom on our hands rather than a sideways continuation pattern to the downside.

With regard to the QQQs, they are in a recovery rally. They have basically recovered half of the downleg from Thursday's high at 35.48 to yesterday's low at 34.11.

So now that we're at the halfway point, the market will start to tell us which way it's likely to head. Will it head still higher to probe very important resistance between 35.10 and 35.30? Or will it run out of gas and pullback or decline again at the very least until today's upgap opening? That would mean that it would have to break back below 34.60 into the 34.45 area.

That's the question. Right now my work is telling me to expect some of each. That is, perhaps a move to 34.90, and then a downdraft that fills the gap to 34.45. After that we'll have to see which way it goes. Unless and until 35.50 is taken out on the upside and sustained, all this action to me is just another rest or relief rally within the dominant downtrend that is still in force at this time.

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