Editor's note: this column was originally published on Capital Essence's CEM News on January 09, 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 10, 2008 .
We've noted in the previous Market Outlook that "the market had reached the level where a major decision is needed - investors should decide whether or not the five years old bull market remains intact." Equity market snapped back Wednesday, erasing earlier losses, as investors loaded their trucks with cheap inventories. It seemed to us the five years old bull is still with us. Overall it was a positive day on the Street. As a matter of fact, Wednesday's trading action was very consistent to what we've predicted in our previous "Cubes Speculator Bulletin": "the bullish divergence on the VIX is pretty interesting. It's indicative that we're at or very near a short-term tradable bottom."
Chart 1.1: Volatility Index (daily).
As you can see, the volatility index refused to take out November's high as the market melt down Tuesday's afternoon. We've noted that: "the action is [short-term] bullish for equity" - "Cubes Speculator Bulletin" January 8, 2008 . And as expected, the Nasdaq Composite snapped an eight day losing streak Wednesday, rose 1.39% for the day. The newly NASDAQ 100 ETF (QQQQ) call option set up gained about 40% intraday.
Chart 1.2: NASDAQ Composite Index (daily).
As expected, the latest move into the area August's low was met with an aggressive wave of buying interest. Technically speaking, the index had underwent a bullish "key reversal day" – a process in which price drops below the previous day's low, then turns up and closes above previous day's close on above average volume. Chances are this will evolve into a meaningful bounce. The most obvious level to watch, for the time being, is the triple resistant, about 2600. Short-term support is about 2386.
Chart 1.3: Standard & Poors 500 Index (daily).
Similar to the NASDAQ, the S&P 500 index had also printed a bullish "key reversal day" on the daily chart. As noted above, more likely than not, the bounce could continue for a couple of days. The most obvious level to watch is the dead cross – the bearish 50 and 200 day moving averages crossover – about 1470/90. Support is about 1360/70.
Chart 1.4: Dow Jones Industrial Average (daily).
Similar to its peers, the blue-chips index had also printed a bullish "key reversal day" on the daily chart. Again, a rebound is expected with an upside target around the "dead cross" area, about 13300. An upside follow-through tomorrow will confirm this. Support is about 12500.
In summary: Wednesday's bullish reversal was, definitely, refreshing. Odds are this is the beginning of the long awaited oversold bounce. As always, we must stress that until the major indices close above the 200-day moving average, the bears still have the benefit of the doubts. With that said, chances are this rally is just another dead cat 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 subscribe. It's now available at a monthly rate.
