Editor's note: this column was originally published on Capital Essence's CEM News on November 03, 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 November 05, 2007 .
We've offered in our Thursday evening "Cubes Speculator Bulletin" that: "given the magnitude of Thursday sell-off, market is conditioned to a "mini" bounce" – stocks closed higher Friday with the Dow Jones Industrial Average finished 27 points, or 0.2 percent, higher to 13595 and the tech-laden NASDAQ climbed nearly 0.6 percent to 2810.
One stock that jumped significantly on the week was eHealth, Inc (EHTH). Shares of the leading online source of health insurance for individuals, families and small businesses, jumped +15.83% Friday, and +22.66% for the week, after the company reported the third quarter ended September 30, 2007 earnings of $0.15 per share, $0.03 better than the Reuters Estimates consensus of $0.12.
EHTH gained about +26% since profiled in our October 30 "Swing Trader Bulletin" as a buy candidate. Though admittedly extended at current levels, expect the shares to draw buyers on a pullback to recent bullish breakout point, around $30.
The dollar lost ground again Friday, and hence, provided a boost to a number of commodities, including gold which traded up 2.39% to $806.30 per ounce.
And energy. Crude oil gained +2.61% to $95.93 per barrel amid a lower greenback.
Can you imagine that not so long ago, as a matter of fact it was last year, $1000 gold and $100 crude were the wildest dreams? And I can't help but wondering where are the pundits, who were pounding the table for $30 oil on CNBC last Christmas?
With gold and oil prices raise rapidly day after day, the inflation genie will be out of the bottle in no time, I guess!
As you can see from the Commodity Research (or Inflation) Index chart above, inflation has, in fact, raised its ugly head. We'll get to hear a lot of the bear market stories like inflation, interest rate hike, slow growth or recession…etc as soon as the index takes out the '06 high.
Let's take a look at the major indices:
Shortly after our October 15 warning: "the technical non-confirmation in the Transports is indicative of the Industrial's near term correction…[which] could be sharp and swift."
The Dow Industrial dropped about -500 points. And the Transport, meanwhile, continues to struggle around the 52-week low and hence, still not able to confirm the Industrial's all-time high recorded on October 9.
As you can see, the Dow Jones Transport Average continues to trade below the four-year rising trendline as resistant since the July's sell-off. This doesn't look very healthy.
You'll get to hear a lot about the primary downtrend or Dow Theory's sell signal from the main stream media as soon as the Transport drops below the August's low.
For those who are not familiar with the term, Dow Theory suggests that a major trend in the stock market must be confirmed by a similar movement in the Dow Jones Industrial Average and the Dow Jones Transportation Average. A significant trend is not confirmed until both Dow Jones indexes reach the new highs or lows; if they don't, the market will fall back to its former trading range.
Hurt by the negative impact of the subprime lending crisis, the banks gave back about 50% of the 2002-2007 gains in just 8 months. Although admittedly vulnerable for further declines, the banks should be able to attract value oriented investors at current level. Next support is at the 61.8% Fib Retracement about 420. Resistant is about 500.
"As goes the bank so goes the tape."
The S&P 500 Index gave back about 38% of the August-October's gain the past couple of days amid a renew subprime worries. The index is currently trading at support. A failure to attract buyers at this level suggests that it might have to revisit the 1485 level.
Bottom line: evidence of aggressively negative sentiment toward the financials was seen in last Friday trading action. In this business, news is best at top and worse at bottom. The news can always get worse, of course; though with the banks and S&P are trading at important support, this could be a good time to begin to look for signs of seller capitulation and hunting for value in the group. Further, the vertical lift in commodities (oil and gold) and the directly related drop in the U.S. dollar since the Fed cut the discount rate in mid-August suggests another liquidity propelled rally (similar to that of the late August) could follow shortly. General speaking, things could continue to look ugly and sometimes, make no sense though these are what this market is making of. And until that change, the overall market condition is still good for stocks. And it would be helpful if Transport also joins the party.
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.
