Editor's note: this column was originally published on Capital Essence's CEM News on January 23, 2008. 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 January 24, 2008 .
Yesterday we've said that: "the market might have hit the short-term bottom…there's a pretty good chance that [the bounce] will last for a couple of days" – equity market kicked off a nice rally Wednesday that saw the Dow recovered all of the 300 points loss earlier in the session and then some to close up 298 points – that was a 600 points swing. For the day, the Dow Jones industrial added 2.50%. The Standard & Poor's 500 Index rose 2.1%. The NASDAQ Composite gained 1% after sinking more than 3% earlier in the session. The small cap, Russell 2000 Index outperformed its larger peers, jumped 3.26%.
It worth notice that homebuilding and financial led Wednesday's advance with the Philadelphia Bank Index (BKX) jumped +8.02% to $86.57 – 23 out of 24 components finishing in positive territory.
Chart 1.1: CBOE Market Volatility Index (daily).
The CBOE Volatility Index, or VIX, retreat from the multi-year high and hence confirmed our "tradable low" notion. For starters, VIX peak is indicative of an outright panic among market participants, which often associates with market bottom.
Chart 1.2: Russell 2000 Index (daily).
We've offered right here a couple weeks ago that: "the most obvious level to watch is the 2006's low…Expect some sorts of short-covering rallies around this level" – the small caps index rebound nicely after the test of support around the 2006's low was met with an aggressive wave of buying interest. The action is pretty encouraging, at least in a short-term. Expect a test of resistant around the area of 2007's closing low, about 735, in the upcoming days. Support is about 650.
Chart 1.3: Dow Jones Industrial Average (daily).
The blue-chip index printed a bullish reversal bar on huge volume. This is bullish. Expect a test of resistant around the area of previous bearish breakdown point, about 12700, in the upcoming days. An upside follow through tomorrow will confirm this. Support is about 11630.
Chart 1.4: Standard & Poors 500 Index (daily).
Similar to the Dow, the S&P also printed a bullish reversal bar on two time daily average volume. The action is pretty bullish. Expect a test of resistant around the area of 2007's closing low, about 1374, in the upcoming days. An upside follow through tomorrow will confirm this. Support is about 1270.
In summary: Wednesday's trading action had confirmed our "short-term bottom" notion. Although, the technical background suggests that this is not the final bottom of this bear market. With that said, the bounce is counter trend in nature and hence should be taken as an opportunity to trim holdings. And we believe that a nice short-selling opportunity will be unfold sooner rather than later.
Until next time, good luck.
(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.
