Editor's note: this column was originally published on Capital Essence's CEM News on October 19, 2007. It's being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.
Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday October 22, 2007 .
We've opined in last Monday's Market Outlook that "market has reached an overbought region across all time-frames, a situation that is a precursor to a significant corrective phase… the upcoming correction could be sharp and swift" – US market stumble out of gate Friday with the Dow lost -367 points or -2.6% to 13522. The lost was, however, relatively small as compare to that of Black Monday – on that October day, 20 years ago, the Dow Jones Industrial Average plummeted 22.6%.
Overall, it was a very bad day on the Street though it was kinda expected. As a matter of fact, Friday's trading action was very consistent with what we've predicted in our previous "Cubes Speculator Bulletin".
Editor's Note: the "FXY vs. S&P 500 Index" chart below was originally published on Capital Essence's Cubes Speculator Bulletin on October 18, 2007 . It's being republished for the benefit of the loyal readers.
This is what we've noted in the October 18 "Cubes Speculator Bulletin": "the yen traded like it wants to go higher and this doesn't bode well for the bulls. [As you can see], the yen's bullish breakout in early July was a "tells" for the summer massive sell-off (see the 2 big blue boxes on the chart's upper panel). MACD had also given the bullish breakout a big "thump up" (see the small yellow box on the chart's lower panel). [In short, US
Fast forward to Friday:
The Rydex CurrencyShares Japanese Yen Trust (FXY) added on +0.89% Friday, and hence, confirmed Thursday's bullish breakout.
And the S&P 500 Index, meanwhile, stumble out of gate Friday, lost about 40 points or -2.56% to 1500.63. Any Put Option traded could have earned a triple digits return intraday.
Whether Friday sell-off is merely a short-term correction within a long-term uptrend or it's the beginning of something worse is remained to be seen. Though, the good news is: the S&P has got much "closer to home". As you can see, the index had moved into the area of 50-day moving average support after Friday's massive sell-off. This is a very important area because it's where big market players place their trades.
As you can see from the above chart, market has been conditioned to "buy-the-dip" [around the 50/200-day moving average] – a strategy that rewards handsomely since '04. This is, however, doesn't mean that the market will be rocketing higher from here. It could move a bit or a lot lower before it goes higher. So, it'd be wise to look for hints of selling capitulation before making the "bottom" call.
In summary, although seemingly vulnerable for further decline, the market had reached a short-term extreme oversold condition, a situation that is a precursor to a counter-trend rebound.
Until next time, good luck!
(By: Michelle Mai for Capital Essence)
Note: Michelle Mai writes technical analysis for Capital Essence and is the editor of Capital Essence's "Market Outlook" newsletter. To receive the daily edition, please subscribe. It's now available at a monthly rate.
