Editor's note: this column was originally published on Capital Essence's CEM News on December 15, 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 December 17, 2007 .
Stocks tanked Friday, ending a tough week on a down note, after the government released reports showing higher inflationary pressures and hence raised concerns that the Federal Reserve won't be able to keep cutting interest rates, even as the economy continues to struggle. For the week, the Dow lost 2%, S&P 500 lost 2.4% and the tech-rich NASDAQ composite lost 2.6%.
Unsurprisingly, the US Dollar is the beneficiary of the ongoing inflation worries. This is bullish for the overall economy from a long-term view. Though after the sharp recovery rally over the past two weeks, dollar has had a pretty nice ride since our bullish comment on the currency on early December, it'd be good to know "whether this rally will continue or not" and for that we have a simple chart to follow:
Chart 1.1: US Dollar Index (daily).
Technically speaking, last week's bullish breakout above the 50-day moving average had set the stage for a test of the double resistant around the 80 level, which is very consistent with our previous prediction. Although, bear in mind that unless the dollar manages to take out this resistant, the attempt rally is simply a short-term technical rebound within a context of a long-term downtrend. Support is about 74.
Here comes the next question, which sector will be benefit from a strong dollar? Let's take a look at the following chart:
Chart 1.2: US Dollar Index versus PHLX Housing Sector Index (daily).
As you can see, housing is highly correlated to the dollar. This couple with the above bullish analysis suggests that the housing is due for a recovery rally. Let's see whether the technical background supports this assumption.
Chart 1.3: PHLX Housing Sector Index (daily).
General speaking, the technical background is pretty weak though the bears will not have any cases as long as the index holds above the 133.65 level. It's important that traders keep the 156 level on their trading radar for a sustain advance above this level will complete the bullish head-shoulder pattern and hence increases the probability for a test of the double resistant, around the 190 level.
Now, let's take a look at the major indices:
Chart 1.4: Standard & Poors 500 Index (daily).
As you can see from the above chart, 2007 is not a good year for "buy-and-hold" folks. Technically speaking, until proven otherwise the range bounce scenario remains intact.
Chart 1.5: Dow Jones Industrial (daily).
Similar to the S&P, the blue-chips index is also stuck in a range. There are quite a numbers of "head-shoulder top" chatters out there. However, until the index breakout from the 14200-12700 trading range, I would be a fool if I tell you anything more than this.
In summary: looking ahead, US dollar and housing sector could continue to rally into year-end. And, as we've discussed right here a couple months ago, a higher Dollar could restrain equities from going higher.
(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.
