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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday August 20, 2007.
As we've predicted right here in our previous Market Outlook "market had found its short-term bottom", equity market rallied across the board Friday amid a surprise short-term rate cut – the US FED Reserve cut discount rate by 50 bps (to 5.75% from 6.25%).
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Unsurprisingly, the sector that had been hit the hardest by the mortgage lending and widening credit spreads crisis for several weeks, financial, led Friday rally with an impressive gain of 3.53%.
As predicted, the Bank Index (BKX) tested resistant at the big W (double bottom) pattern neckline @ 110 Friday. At this stage, it's impossible to know whether the resistant holds or not. Although there is an even tougher layer of resistant that runs from 112-115. Bear in mind that the tape could turn for the worse should the financial stocks frizzle out around this level. As we've always said, the financial stocks have been the "tells" and they should be on your trading radar.
Of the other nine sectors closing sharply higher, Energy turned in a similarly strong performance. Crude for September delivery rose about 1.4% and closed near $72/bbl as Dean strengthening into a category 3 hurricane in the Eastern Caribbean raised concerns about supply disruptions in the Gulf of Mexico.
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As you can see, the Oil Index is testing support at the one-year rising trendline. This is a very important level for a successful test will fuel a rally that might propel prices to the early Augusts' high about $78.70. And a failure test, meanwhile, will complete the bearish double top pattern; and hence, opens the doors for a test of the major support around the $50 level, that's about 22 points or 30% from where we sit.
Let's take a look at the major index charts:
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The Standard & Poors 500 Index (weekly) chart above addresses an intermediate-term frame. As we've predicted in the previous Market Outlook 「expect a test of resistant around the area of the 200-day moving average, around 1450」– see "Market had found its short-term bottom" August 17, 2007; the board market index advanced and tested resistant at the 1450 level Friday. So far, it held. This isn't very encouraging, at least in a short-term. Although as long as the index holds above last week's low @ 1370, the bulls shall prevail. On the other words, a breakdown below this level, especially if it's accompanied by a decline to below the spring's low of 1360 will complete the bearish double top pattern; and hence, opens the door for a test of major support around the 1160 level – that's about 285 points or 20% from where we sit.
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The Dow Jones Industrials Average (weekly) chart above addresses an intermediate-term frame. As expected, the blue chips index bounced off nicely from the triple support. Technically speaking, the Dow looks a lot stronger than its younger sister, the S&P 500 Index because it can drop as much as 1000 points, to about 12K, without bending the long-term uptrend (see chart). With that said, the bulls can sleep well as long as the index hangs above the 12K level. Short-term support is about last week's low @ 12500. Resistant is about 13500.
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The NASDAQ Composite Index (weekly) chart above addresses an intermediate-term frame. Similar to its peers, the tech rich index had also had a wild ride last week. As a matter of fact, Friday trading action was pretty consistent with what we've predicted in our Thursday evening "Cubes Speculator Bulletin" - 「apparently, the elephants had liquidated most their "inventories" by the end of Thursday trading session. We expected the tape to move with a positive bias Friday」- NASDAQ-100 ETF, QQQQ leaped almost 2% Friday. Our September call option holding had gained about 50% in just 2 days.
Technically speaking, the nice rebound followed the test of support at the area of the 40-week moving average suggested that the index might have found the short-term bottom. Although, this doesn't mean that the worse is over. As a matter of fact, the odds for a test of July's high to that of support at the four-year rising channel's lower border is 50-50. Short-term support is at this week's low, around 1386. Resistant is about 2540-2580.
Bottom line: general speaking, last week's oversold relieve rally was definitely refreshing. However, unless the financial stocks move above key resistant, we believe that higher prices will be greeted by sellers – aggressive sellers.
