Editor's note:
this column was originally published on Capital Essence's CEM News on December 08, 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 10, 2007.
Stocks received a nice boost last week that saw both of the Dow Jones Industrial Average and Standard & Poor's 500 Index gained about 2% each finish at 13,625.58 and 1,504.66 respectively. The bulls are, definitely, having their cases. Though after the sharp rally over the past two weeks, equity market up about 7% from the November's low, it would be reasonable to ask ourselves a question "whether this rally will continue or not" and for that we have a simple but very accurate chart to follow (see Chart 1.1).
For starters, the breadth indicator should be read as a strength meter of the intermediate trend. It is unique in that when it becomes extremely overbought (over 85%) it is a bullish sign. When it is greater than 85% corrections tend to be small. However, when it drops to below 70% it is often a warning that an intermediate-term top may be formed. Conversely, it is extremely dangerous to buy when it is below 20%. When the indicator climbs to above 30% from below 30%, it is a signal of internal strength. This has historically led to a major up-leg. In fact, the indicator had done an excellent job picking bottom in the past couple of years.
As you can see, equity market rose sharply immediately after the breadth indicator turned bullish in late November. Technically speaking, everything should be okay unless the indicator makes a nasty U-turn (falls back into the oversold level) from here.
Chart 1.2: Standard & Poors 500 Index.
As expect, the S&P is heading toward the overhead resistant or supply around the 1550 level. At this moment, it's unknown whether this level can be taken out or not though, from a long-term perspective, the bulls shouldn't get into any serious trouble as long as the index holds above support at the long-term rising trendline. Key support is at the area of November's low, about 1360. Bear in mind that a failure to hold above this level will complete the bearish "head-shoulder" pattern and hence suggests that we could be in the midst of a bear market.
Chart 1.3: Dow Jones Industrial.
Similar to the S&P, the blue-chips index is also walking toward the overhead resistant around the 13900 level. As noted above, at this point, it's unknown whether this level can be taken out or not; though, the bears will not have any cases until they manage to push prices below support at the long-term rising trendline. Key support is at November's low, about 12700.
In summary: as
mentioned, there are quite a number of negative factors, such as housing crisis, credit crunch…etc, that can affect stock prices as the 2007 curtain is about to close.
However, there is one thing the bulls have that the bears do not: seasonality.
After all, December and January are traditional strong months for stocks.
Now, exciting as recent rally have been, we will have to see whether the bulls able to absorb the overhead supply and push market to new high.
But if the market starts to fall again and dips below key support then we'll know that the bulls had lost control.
(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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