Editor's note: this column was originally published on Capital Essence's CEM News on January 08, 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 Wednesday January 09, 2008 .
We've noted in the previous Market Outlook that "the manner in which the market danced around its support [for the last couple of days] was not very encouraging." Technically speaking, the action is indicative that there is very little demand for stocks. And according to the "supply & demand" law, price has nowhere to go but lower. And this is exactly what we've seen Tuesday. Stocks started the day marginal higher, just as expected, and drifted slightly upward until AT&T's CEO said in late afternoon that the company is experiencing "softness" in its broadband and phone line businesses due to slowing economic growth. The news sent the company's shares and the overall stock market sharply lower amid recession fears. For the days, the Dow Jones industrial average lost 1.9%. The broader market index, S&P 500, lost 1.8%. As usual, small cap stocks continue to underperform its larger peers with the Russell 2000 index stumble 2.64%.
Interestingly, despite the overall weakness, shares of Dolby Laboratories Inc (DLB), a subjected of our recent bullish discussion, added on the recent gains, jumped 3.50% today on the heel of Monday's 8.08% gains.
Chart 1.1: Russell 2000 Index (daily).
The index followed through to the downside after last Friday's bearish breakdown was greeted by a new wave of aggressive selling. The most obvious level to watch, for the time being, is the 2006's low, about 675. Expect some sorts of short-covering rallies around this level. Short-term resistant is about 735.
Chart 1.2: Dow Jones Industrial Average (daily).
The blue-chips index broke decisively below support at November's low and hence completed the bearish "Head-Shoulder" pattern. The most obvious level to watch, for the time being, is August's low, about 12500. A move below this level will confirm today's bearish breakdown and a test of 2007's low, about 12000, is, therefore, expected.
Chart 1.3: Standard & Poors 500 Index (daily).
Similar to the Dow, the S&P 500 index also broke down below November's low and is heading toward key support around the 1360-1370 area. As mentioned, it's very important for the bulls to hold prices above this level for a sustain decline below it will put an end to the 2003-2007 cyclical uptrend in the US
In summary: as mentioned, 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. With that said a failure to hold above S&P 1360 is indicative that this bull market has ended and a new bear market had just begun.
(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.
