Editor's note: this column was originally published on Capital Essence's CEM News on December 12, 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 Thursday December 13, 2007 .
Yesterday we've said: "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." Stocks started Wednesday trading session sharply higher with the Dow rose almost 300 points at its morning peak. The rally was, however, lost steam as negative developments out of the financial sector weighed on the broader market. For the day, the Dow Jones industrial average gained 41 points. The broader S&P 500 index rose 18 points. The tech-rich NASDAQ composite gained about 9 point.
Of the eight sectors traded higher, energy provided leadership as it rose in conjunction with crude oil prices, which rallied 4.85% to $94.39.
Chart 1.1: Oil Index (daily chart).
Oil broke out decisively after a pullback to support at the area of 50-day moving average was met with an aggressive wave of buying interest. This is bullish. Technically speaking, today's bullish breakout had set the stage for a run back to the 100 level. Support is at last week's low, about 86.
Chart 1.2: Standard & Poors 500 Index (daily chart).
As expected, the index rebound nicely Wednesday's morning. However, a failure to hold on to the early gains is indicative of hesitation among market participants. While the technical background remains very weak, the bears won't have any cases until they manage to push prices below the 1360 level. Short-term resistant is about 1525.
Chart 1.3: Dow Jones Industrial (daily chart).
The blue-chips retested and held above the 200-day moving average. This is encouraging. However, the bulls aren't going to get their groove back until prices climb above the 13780 level. As mentioned, it's very important that the index holds above the 200-day moving average 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 November's low.
In summary: despite Wednesday's rebound, the technical background remains very weak. We'll be watching S&P 1360 for downside follow-through to develop in a next couple of days. With that said, if the November breakdown is still in play, this level should not hold.
(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.
