Editor's note:
this column was originally published on Capital Essence's CEM News on December 04, 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 05, 2007.
Market lost ground for the second straight session amid concerns that stem from the subprime mortgage mess. For the day, the Dow Jones industrial average lost 0.5%, and both of the broader S&P 500 Index and the tech-fueled NASDAQ Composite Index lost 0.7% each.
Despite the overall weakness, shares of Nordstrom Inc (
JWN), a long holding in our "
Swing Trader Bulletin", jumped more than 7% Tuesday on heavy volume.
The long position is holding an amazing unrealized gain about +10% in less than 2 weeks.
Chart 1.1: Nordstrom Inc (daily).
Technically speaking, today's bullish breakout positioned the stock for a test of October's gap resistant, about 47. Support is at November's low, about 30.
It worth noticing that the bank sector led Tuesday's decline after J.P. Morgan Chase (JPM) cut its earnings estimates for a number of brokerages and a Punk Ziegel analyst downgraded Goldman Sachs (GS), Bear Stearns (BSC) and Lehman Bros. (LEH) to Sell from Market Perform.
Our bearish outlook on financial stocks has certainly been no secret to regular readers of this column.
As a matter of fact, the sector has been in a down trend, lost about 20%, since
bearish comment on the sector on
July 18, 2007.
Since the S&P 500 is made up of 20% financial stocks, this is an important influence on the board market index.
There's concern that last week's rebound in the financial sector had run its course and risks remain elevated as we're heading into the tax loss selling season.
Let's see what the chart is saying.
Chart 1.2: Bank Index (daily).
Banking rallied directly toward resistant at the two-month falling trend-line. This is bearish. At this juncture, only a sustain breakout above November 14 high at 101 can wreck the bearish out look and argue for higher prices. Support is at November's low, about 88.
Chart 1.3: Utility Index (daily).
Utility added on to recent gain, up more than 1% for the day.
The action is pretty consistent with our previous
prediction.
Resistant is about 600.
As mentioned, a sustain advance above this level will have the power to fuel a rapid move into the 700 level.
Support is about 490.
Chart 1.4: Standard & Poors 500 Index (daily).
As you can see, last week rally towards the double resistance, around the 1500 level, has thus far failed. The action has increased the probability for a test of support around the 1400 level.
Chart 1.5: Dow Jones Industrial (daily).
The blue-chips index pulled back to support around the 200-day moving average after the test of resistant around the 13500 level was met by an aggressive wave of selling. At the moment, downside risk seems to be limited as long as the index holds above the 200-day moving average. Support is about 12700.
In summary: "As goes the bank, so goes the tape." While the market has had some positive developments in the past couple of days, namely the utility sector's bullish breakout, financial stocks weaknesses is definitely worrisome. As noted above, the Banking Index (BKX) was still in a downtrend as of Tuesday close. With that said, a clear breakthrough on the Banking Index is an important element that needs to be in place for a sustainable rally in the coming days.
(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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