Editor's note: this column was originally published on Capital Essence's CEM News on December 11, 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 Wednesday December 12, 2007 .
Stocks finished significantly lower across the board Tuesday after the Federal Reserve cut the fed funds rate by a quarter-percentage point, as expected, but disappointed some investors looking for an aggressive discount rate cut. The Dow Jones industrial average lost 294 points, or 2.1%. It was the blue-chip indicator's seventh worst day of the year in terms of both the point and percentage loss. The broader S&P 500 index lost 2.5%. The tech-rich NASDAQ composite lost almost 2.5%. Speaking of tech, Tuesday's trading action was, in fact, very consistent to what we've offered in the Monday "Cubes Speculator Bulletin": "QQQ Q traded relatively dry as prices moved higher. The action suggests that the rally is in danger of running out of steam." The NASDAQ 100 ETF (QQQQ) dropped -2.32% today. Any put options traded should have earned about 100% intraday.
Of the nine sectors finished lower, financials have been the hardest hit, posting a loss of -5.22%.
Chart 1.1: Bank Index (BKX).
Tuesday free fall came after the test of double resistant around the 100 level was met with an aggressive wave of selling interest. This is very bearish. Technically speaking, the action had put the November's low back on the table. Keep an eye on the 80-88 level for a decline below this level will trigger all sorts of stops, leading to a strong downside momentum that has the potential to push prices back into the 80 level.
Chart 1.2: Standard & Poors 500 Index.
The board market index printed a huge bearish outside bar at the area of two-month falling trend-line. As you can see, the technical layout was very similar to that of mid-October and early November. We will be watching the short-term support around the 1360 level for a decline below this level indicates a retest of November's low.
Chart 1.3: Dow Jones Industrial.
Similar to the S&P, the blue-chips index also printed a massive outside bar on the daily chart. As noted above, the action is very bearish. We will be watching the 200-day moving average, about 13200-ish, for a decline below this level will put the bears back into the driver side.
In summary: today trading action suggested that the technical oversold bounce that started on late November is over. However, we must stress that in recent years, the market's responses to monetary edicts come in the frustrating form of several changes of mind over several days – also known as "post-FED hangover". With that said, Tuesday afternoon's sell-the-news reaction might not be the "season finale" in this year-end drama. Consistent with these thoughts, we believe, the market is due for a counter trend rebound, which could take place as soon as Wednesday.
(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.
