Editor's note: this column was originally published on Capital Essence's CEM News on January 06, 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 Monday January 07, 2008 .
We've offered here a couple days ago that: "equity traded like it can't find any solid footing, so the path with least resistance, at the present time, is to the downside." – "Commodities are still better bets than equities" January 02, 2008 . Stocks stumble out of gate Friday with the NASDAQ led market to the downside, lost almost 100 points, its largest single-day decline on a point basis in 5 years. Its hardcore, the NASDAQ 100 Index took the biggest beating, down more than 88 points or -4.28% for the day. The decline was pretty naughty though it was very consistent to what we've predicted in our January 01 evening "Cubes Speculator Bulletin": "new sell signal… volatility indicates a high probability for a retest of November's low, about $49." The NASDAQ 100 ETF (QQQQ) broke down decisively Friday, lost more than 2 points or 4.39% to close at $48.40. The newly QQQQ January 52 put option (QQQMZ) setup gained more than +300% in just 4 days.
Chart 1.1: NASDAQ 100 Index (daily).
As predicted, the index pulled back to support at the area of 200-day moving average. Despite last week's sell-off, the long-term uptrend remains intact. With that said, the bears will not have any cases unless prices break below support at August's low, about 1800.
Chart 1.2: Russell 2000 Index (daily).
The small caps index dropped below key support at the area of November's low, and hence, completed the bearish "lower-high lower-low" pattern. The action is indicative of a test of intermediate support around the area of 2006's low, about 680. A downside follow-through Monday will confirm this. Resistant is about 775.
Chart 1.3: Dow Jones Industrial Average (daily).
Friday's weaknesses had pushed the blue-chips index back to its immediate support around the area of November's low. At this juncture, it's impossible to know for sure whether this support holds or not. Though, as mentioned, a sustain decline below this level will complete the bearish Head-Shoulder pattern and hence ended the five year old (2002-2007) bull market. Resistant is about 13300.
Chart 1.4: Standard & Poors 500 Index (daily).
Similar to the Dow, the S&P 500 index had also pulled back to the area of November's low immediately followed a bearish breakdown below short-term support at 1435. As mentioned, it's very important for the bulls to hold prices above the 1406-1370 level for a sustain decline below this level will put an end to the 2002 cyclical uptrend in the US
In summary: needless to say, the market is in a very bad shape after Friday's massive sell-off. It seems to us that the market had reached a major decision point, where investors should decide whether or not the five years old bull market remains intact. From a short-term perspective, the market is pretty much oversold, and a counter trend rebound is, therefore, expected.
(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.
