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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday August 13, 2007.
We've opined right here in the previous Market Outlook that "Thursday trading action indicated that the market is on a verge of breaking down" – see "Market is on a verge of breaking down" August 10, 2007; equity market gapped down significantly Friday morning with the S&P 500 lost as much as 1.6% of its value at one point before Fed stepped in and injected about $38 billion (biggest since 9/11) into the market. Were it not for Friday afternoon's bounce, the S&P could have suffered its fastest 100-point decline since 2003.
With trouble surfacing as far away as Europe, the mortgage-market risk is much larger and more damaging than anticipated. And this is the last thing the bulls wanted to see.
Given its substantial exposure to mortgage lending and widening credit spreads, the Amex Securities Broker/Dealer Index (BDX) got hammered and slipped below key support at the four-year rising trendline. The action had spelled the end to the upleg that started early 2003. Given the high correlation between the financial stocks and the Standard & Poor's 500 Index, the free-fall BDX indicated that the board market index is going to break apart sooner rather than later.
Let's take a look at the major indices charts:
The Standard & Poors 500 Index (weekly) chart above addresses an intermediate-term frame. The index had printed a potential double top pattern on the weekly chart. As mentioned, a sustain breakdown to below key support at the four-year rising trendline will complete the bearish pattern and hence, suggests that the index might have to experience a serious price cut, about 30-50%, in the upcoming days. A decline to below 1360 will confirm this. Support is about 1427-1410. Resistant is about 1500.
The Dow Jones Industrials Average (weekly) chart above addresses an intermediate-term frame. Given its limited exposure to mortgage lending and widening credit spreads, the blue-chips index is in a much better shape than its sister, the S&P 500. Technically speaking, the index can drop to as far as 12800 without bending the long-term uptrend. Support is about 13000-12800. Resistant is about 13650.
The NASDAQ Composite Index (weekly) chart above addresses an intermediate-term frame. Similar to its peers, the tech rich index also experienced a bumpy ride last week. As a matter of fact, last week trading action was pretty consistent with what we've predicted in our mid-week "Cubes Speculator Bulletin" – "the first test of resistant the $49 level is destined to fail. It's expected to be followed by a retest of the $47 level" – after an initial bounce into the $49 level was greeted with an aggressive wave of selling, the NASDAQ 100 ETF (QQQQ) made a sharp reversal last Thursday and hit as low as $46.63 Friday. Any put option traded could have made about 300% in less than 3 days.
As was the case the past three times the index tested resistant at the four-year rising channel's upper border, prices suffered a substantial pull back (see chart above). With that said, if history is our guidance, then the decline still have more than 300 points or about 13% to go.
Further, if you had thought that the NASDAQ could be a safe haven during this financial crisis, you might have to … re-think! The NASDAQ market comprises of 3278 stocks, in which 512 stocks are banks, 116 are financials, 70 are insurance and 28 are Real Estate. That gives the NASDAQ a 22% exposure to the mortgage lending and widening credit spreads. So, what's the point? Well, the point is, the NASDAQ will have to test support at the rising channel's lower border if the credit crunch if for REAL.
Bottom line: general speaking, the recent breakdown in the financial stocks had not only reconfirmed what we've said back on July 18, "financial stocks are entering a secular bear market" but also suggested that the day of reckoning is near.
Until next time, good luck.
