Editor's note:
this column was originally published on Capital Essence's CEM News on November 07, 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 November 08, 2007.
If the sharpest decline is taken place in the strongest bull market, then this is one heck of a bull. Stocks stumbled out of gate Wednesday with the Dow industrials finishing 360 points lower amid renewed credit market fears. Banks and brokerage stocks tumbled following a handful of warnings issued Wednesday that more write-downs were likely before the year's end. Citigroup (C) continued its recent decline, falling 3%. Goldman Sachs (GS) fell 4% and Lehman Brothers (LEH) was nearly 6% lower. Morgan Stanley (MS) shares finished 6% lower in regular trade on the New York Stock Exchange after the company announced late Wednesday it would take $3.7 billion loss on the firm's subprime mortgage exposure.
In related news, shares of Freddie Mac (FRE) and Fannie Mae (FNM) fell 8.63% and 10.11% respectively after New York Attorney General Andrew Cuomo issued a subpoena to the government-related lenders as part of an investigation into loans the pair purchased from banks such as Washington Mutual. Shares of Washington Mutual (WM) tumbled over 17%. And the bad news goes on and on. It just seems like we get these repeats every few days.
Given the negative credit market headlines, it was not surprising that the Bank index (BKX) finished 5.79% lower.
The index is currently traded at key support around the 50% Fibonacci retracement level.
According to the fifty percent principle, price is likely to resume the existing trend after giving back 50% of recent gains.
With that said, "How long does the credit crunch last" is anyone's guess, though with the banks reaching the level that precedes a technical rebound, this is a good time for the bears to consider taking some money off the table.
Just so that you know, the index had lost about 20% since our
bearish comment on the sector on July 18.
The greenback also at the center of market's discussion as it got knocked back on a report that China might pursue a plan to adjust its dollar holdings in favor of stronger currencies. The dollar index hit its lowest level since inception at 75.077 before rebound a bit to finish the day down 0.8% at 75.412.
Once again, the dollar weakness was seen as a buying catalyst for commodity. Oil and gold futures traded as high as $98.62 and $855.00 respectively at one point. Oil prices, however, sold off and finished the day down 0.3% at $96.37. Contributed to the late day reversal were the bearish inventory report and profit-taking as the contract had got pretty close to the psychological $100 mark.
Though admittedly extended at current level, expect the commodity to draw buyers on a pullback to around the mid $80's.
Just to keep track, oil had gained almost +40% after we've declared the commodity as a "
secular winner" in the end of August.
Let's take a look at the major indices:
The S&P 500 Index (daily) chart above addresses a short-term time frame.
As we've noted here in the
previous Market Outlook: "
until or unless the S&P takes out the October 11 high at 1577, expect things to be sloppy at current level" – the board market index got hit very hard today, lost almost 3% for the day.
Wednesday decline had pushed the index back into the area of key support at the 200-day moving average.
Expect a test of the 1440 if the index fails to attract buyer at current level.
The Dow Jones Industrial Average (daily) chart above addresses a short-term time frame. Similar to the S&P, Wednesday decline had also pushed the blue chip index into the area of 200-day moving average. As mentioned, this is a very important support. A failure to hold above it will increase the probability for a test of August's low.
Bottom line: market has reached a short-term oversold condition, a situation that is a precursor to a counter-trend rebound.
(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.
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