Editor's note:
this column was originally published on Capital Essence's CEM News on December 17, 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 December 18, 2007.
We've
offered in the previous Market Outlook that: "
US dollar and housing sector could continue to rally into year-end though a higher Dollar could restrain equities from going higher."
Monday, stocks stumble out of gate, building on the previous week's declines, amid rising inflationary pressures and slower growth prospects.
For the day, The Dow Jones Industrial Average lost 1.3%. The broader S&P 500 Index lost about 1.5%. The tech-rich NASDAQ Composite lost 2.3%.
Overall it was a very bad day on the Street.
We were, however, very impressed with the Dollar's ability to rally, the greenback gained ground against the euro, in the face of disappointed economic reports.
Before Monday opening bell, it was reported that the New York Empire State Index showed a reading of 10.3 for November.
While a number above zero reflects growth, the reading was well below the prior month's reading of 27.7 and the consensus estimate of 20.0.
It also worth noticing that, the housing sector managed to finish above the zero line, up +0.17%, despite the National Association of Home Builders' report that showed homebuilder sentiment remained at a record low for the third straight month.
Chart 1.1: PHLX Housing Sector Index (daily).
As
discussed, the bears will not have any cases as long as the index holds above the 133-140 level.
Further, a sustain breakout above the 156 level will increase the probability for a test of resistant at previous breakdown point, around 190.
Chart 1.2: Standard & Poors 500 Index (daily).
Monday decline had pushed the index below the short-term support at the 1460 level. This is bearish. Technically speaking, things look very poor going forward. A downside follow-through tomorrow will confirm a retest of key support around the 1400-1370 area. Resistant is about 1500.
Chart 1.3: Dow Jones Industrial (daily).
It should be noted that Monday's flop left the Dow below the 200-day moving average. This is bearish. A downside follow-through tomorrow will confirm a retest of key support at the area of November's low, about 12700. Resistant is about 13500.
In summary: the U.S. dollar is doing a very good job since our positive comment on early December.
To
reiterate, we don't know how high would the dollar be twelve month from now, but we do know that the greenback could continue to rally into year-end.
Further, as noted above, the "short housing" trade has become overly crowded and sentiment has grown so negative that the group will likely react well to any good news that comes out over the next few weeks.
Regarding equity market, Monday's trading action is indicative of urgent selling, which prompt us to stay on the sideline while waiting for a bottom.
That's said, while remain cautious on equities, we've loaded the truck with some greenback and selected housing names for a year-end trade.
(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.
