Editor's note:
this column was originally published on Capital Essence's CEM News on November 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 Tuesday November 13, 2007.
It was an interesting start of the week. After an impressive rebound in the morning that saw the Dow gain more than 100 points, the market reversed and closed around the low of the day amid another round of broad-based selling activity in the final half hour.
It worth notice that, the financial sector (BKX) was one of the better-performing sectors in Monday's trading, up more than +1%, as it benefited from bottom-fishing interest in a host of names including Goldman Sachs (GS) and Washington Mutual (WM).
This is exactly what we've been
talking about in the past couple of days.
Chart 1.1: Bank Index.
As
expected, the banks rebound nicely Monday, up +1.18%.
The index has a layer of short-term resistant that runs from 98-100.
Support is at last week's low, about 90.
Chart 1.2: Standard & Poors 500.
The board market index cut through support at the 1450 level like hot knife through butter. This is not good. However, with the volatility index reaching the level that precedes an oversold bounce, this is not a good time to initiate new sells. As you can see, the volatility index had done a very good job in pointing out the short-term bullish reversal in the past couple of years. Support is at the ten-month lateral trendline, about 1400. Resistant is about 1450-1490.
For those who are not familiar with the term, volatility refers to the characteristic of a security, commodity, or market to rise or fall sharply in price within a short-term period. A higher volatility means that a security's value can potentially be spread out over a larger range of values in a short period of time. High volatility also suggests pessimism among market participants. Extreme pessimism is often coinciding with important market's turning point.
Chart 1.3: Dow Jones Industrial Average.
Similar to the S&P, the short-term volatility is also seemingly "peaking" right here. Support is at the ten-month lateral trendline, about 12800. Resistant is about 13400.
Chart 1.4: Russell 2000 Index.
The small cap index is currently trading at the one-year lateral trendline support. Similarly to its peers, short-term volatility is also forming a "peak" here. Support is at August's low, about 736. The index has a layer of short-term resistant that runs from 788 to 810.
In summary: fear, as measure by the short-term volatility index, is certainly mounting as market reaches a short-term extreme oversold condition. This is a situation that, often, precedes a meaningful bounce.
(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
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