While the overall weakness of the US Equity Markets this summer has been a source of much concern for long-term investors, short-term traders however are relishing in the abundance of volatility that has entered the markets during this time. As discussed in previous issues, the markets weakness is centered upon the tech sector, which has been affecting nearly all other measures. It has continued to be this way despite recent attempts to recover.

The last several trading days have been characterized by a relatively good degree of buying pressures. Markets are once again pushed-up against some key short-term resistance points. The reactions to these will serve as a very good guide to short-term directional impulse. Let's take a look at the charts:

Chart Notations:

• The Daily Line overlay chart above comparing the Nasdaq-100 or $NDX (red) and S&P500 (blue) addresses the short-term time horizon

• We clearly see the weakness of the Nasdaq here (representing the Techs and other speculative issues of the markets) and conversely, the strength of the S&P500 (representing a diversified list of primary issues). 

• Notice that the Nasdaq has been contained over the last several weeks below a key support point (yellow dotted line). This has now served as a tough resistance point. As long as the Naz is contained below this area, it is not likely that the S&P500 (and therefore the rest of the markets) will be able to experience any sustainable rallies, much less attempt a move towards a new high (blue dotted line).

• While overall pressure remains to the downside, this important pivot point in the Naz, which sits approximately at the 1511 area, serves as a mark that will clue us in very short-term directional impulses. Let's consider the inverse: A Daily close above this point will trigger a set of long-awaited rallies to build upon what has already started over the last few days. Bears should be very careful if and when the market is able to close above our pivot point in the Naz (daily basis).

Chart Notations:

• The Daily chart of the S&P500 Index above addresses the short-term time horizon.

• In the chart earlier, we marked 1511 as an important pivot zone in the Naz. The corresponding mark on the S&P500 would be the 62% Fibonacci retracement. 

• Above we have measured the Fibs on the S&P500 beginning with the high of the year and down to its lowest print in June. At this point, the market is fast approaching the 62% retracement (green), which serves as very short-term resistance. This sits at approximately 1285, which we shall treat as Resistance.

• If the market is able to sustain trade above the 1285 mark, we are looking for continuation of the upward correction into the next Fib mark at 1303, and follow the same process there for a complete 100% retracement. Although this is the S&P500, let's still keep a close eye on the Naz, as it does greatly affect trends and momentum of the S&P500. 

Chart Notations:

• The Hourly chart of the Nasdaq-100 above addresses the very short-term time horizon (10TD or less).

• The recent volatility in the markets has produced a group of sizable gaps which have been the basis of plenty of good trading over the last few weeks. 

• Out of the 15 gaps we have in this time period, four remain open. These are marked by the gray areas that extend all the way to the right side of the chart. As we have mentioned many times in the past, gaps are neutral zones: they serve as important support and resistance areas for larger time frame analysis, but one thing is very consistent: greater than 99% of them will be filled, it is just a matter of TIME.

• At this point, we will use the open gaps as key areas for setting targets as the market travels from one neutral zone to the next. There is also a trendline in play over the next few days, marked in blue. I have placed the directional guides accordingly, with the size of the arrows indicating size of trend.

Until next week: Good Luck!   Fernando Gonzalez

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Fernando has over 6 years of high volume professional trading experience, with a long-term track record of profitability. He helped develop the original material and coursework for Online Trading Academy. He has designed and individually conducted courses for over 400 trading students and several hundred others in Lectures, Forums and Intraday participation within the Day Trading Education and Advisory Community. He has also co-authored a best-selling book: Strategies for the Online Day Trader (McGraw-Hill 1999), which reached overall best-seller list on Amazon.com & section bestseller list for Barnes & Noble and other notable sources.

DISCLAIMER: 
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

ABOUT THE WEEKLY REVIEW:
The weekly review heavily focuses on the application of Technical Analysis on the Broad Market Levels. You will rarely see individual Stock Picks on the Weekly Review! It is the author's belief that most Individual Stocks (certainly not all) will follow the overall direction of the Broad Market that surrounds them, as well as the Sectors they comprise. Discussion is focused heavily upon the Major Market & Sector price activity. Rarely also will you see discussion of the fundamental, macro-economic or political nature in the Weekly Review. By focusing only on the technical, or price & volume aspects of the major measures of the market, Fernando hopes to satisfy any equity trader's needs for a qualified discussion and forecast of the overall direction of equities, whether it be the Short, Intermediate, or Long-Term time horizons. Whether you trade the Index Futures, Index Tracking Stocks or Individual Equity Market Instruments, having an experienced eye on the conditions of the broad market that surrounds you is extremely important!

© 2006 Fernando Gonzalez
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