Editor's note: this column was originally published on Capital Essence's CEM News on January 01, 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 02, 2008 .
Gold and oil are, definitely, the shiny stars for 2007; while homebuilders, financials and retails are the ugly spots. With the calendar turns to 2008, the question will be which sectors will keep dancing and which ones will leave the party. And for this, we have a couple of simple charts to follow:
Chart 1.1: Gold Index (weekly).
So far so good, the yellow metal broke out nicely from the two-month consolidation pattern to test to the early November's high, about 845. Technically speaking, a sustain advance above this level will set the stage for a test of the psychological 1000 mark. Support is at previous bullish breakout point, about 730. Any portfolio invested heavily in gold since our September 7 bullish comment should have gained about +20%.
Chart 1.2: Crude Oil Index (weekly).
Similar to gold, oil is hanging at record high. This is bullish. Although admittedly extended at current level, the commodity had gained about +33% immediately followed our August 27 bullish comment, a pullback to support at the area of moving average should be met with aggressive buyers. Resistant is about 100.
Chart 1.3: Bank Index (weekly).
Our bearish stance on financial stocks has certainly been no secret to regular readers of this column. As a matter of fact, the bank index (BKX) had lost about 22%, since our July 18, 2007 bearish comment on the sector. Technically speaking, the sector is pretty much oversold. And at some point, short sellers would have to cover their positions and that is a ray of light for the bulls. Resistant is about 100.
Chart 1.4: Home Construction Index (weekly).
Clearly, the long-term downtrend remains intact. Although the positive divergence Relative Strength Index (RSI) at fourth quarter low is suggestive of a potential retest of resistant at the area of falling moving average, about 430. As always, we must stress that this sector is still a bear market and hence, not recommended for the faint of hearts. Support is at November's low, about 262.
Chart 1.5: S&P Retail Index (weekly).
2007 had been a tough year for many retailers. As you can see, the retail index is pulling back to the area of long-term support immediately after the summer's breakdown. The Relative Strength Index (RSI) also seems pretty depress though this doesn't mean that prices can't go a bit higher before moving down, a lot lower. As a matter of fact, selling into counter-trend rally can be very attractive in term of risk/reward ratio. Resistant is about 470. Also, bear in mind that a sustain decline below the November's low, about 398 will complete the large bearish broadening top pattern and hence, set the stage for a test of support at the 2003 bullish breakout point, about 350.
Chart 1.6: Standard & Poors 500 Index (weekly).
The board market is made up of 20% financial stocks. With the BKX down more than 20% for the year, it's hard to believe that the S&P is merely 5% off its record high. And we believe that the bulls will not get into any serious trouble as long as the index holds above August's low, about 1370.
In summary: needless to say, the market is doing amazing well despite the ongoing credit crunch. So, for 2008, technical background suggests that this year is just a continuation of where 2007 left off. With that said, commodities are still in good position to go higher. And beaten down sectors like home builders, financials and retail, while still stuck in the long-term downtrend, were oversold in all time frames, a situation that, often, precedes a meaningful bounce. In short, technical background indicates that the bulls are still largely in charge.
(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.
