Editor's note: this column was originally published on Capital Essence's CEM News on January 21, 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 Tuesday January 22, 2008 .
It was another exhausting week of trading as the major indices moved significantly lower driven by recession concerns and the troubled financial crisis. For the week, the S&P 500 down 76, or 5.4%, to 1325, and is 15% below its October peak. The NASDAQ Composite Index gave up 100, or 4.1%, to 2340, and is 18% below its October high. The Dow Jones Industrial Average ended the week down 507 points, or 4%, at 12,099. It has dropped about 10% in the past four weeks, and is 15% below its October peak. This is the Dow's worst-ever start to a year.
With the market fell for a fourth straight week, putting it on track for the worst January ever, it's important to ask that whether this bear-market has some legs. And for this, we have a couple of simple charts to follow.
Chart 1.1: CBOE Volatility Index (weekly).
Last week, the Chicago
Chart 1.2: Standard & Poors 500 Index (weekly).
The board market index is pretty much oversold on a medium term basis. As you can see, the Relative Strength Index, a typical overbought/oversold indicator, had dropped to the level that had not seen since 2002. General speaking, this could help to start putting in a tradable bottom for a bear-market rally. Long-term support is at the area of 2006's closing low, about 1223.69. Short-term resistant is about 1374-1400.
Chart 1.3: Dow Jones Industrial Average (weekly).
The blue-chip index is testing key price level at the area of support 2007's closing low, about 12050.41. At this moment, it's impossible to know for sure whether this level holds or not. Though with the Relative Strength Index reaches the level that had not seen since 2002, hopes for a counter trend rebound are running high. As mentioned, a walk below 2007's closing low level on closing basis will downgrade the long-term trend to bearish from bullish. Short-term resistant is about 12600.
Chart 1.4: NASDAQ Composite Index (weekly).
Similar to the Dow, the tech rich index had pulled back to key price level around 2007's closing low, about 2340.68, after last week sell off. As noted above, at this moment, it's impossible to know for sure whether this level holds or not. Though with the RSI reached the level that precedes a meaningful rebound in a past couple of years, a snap back rally could be in the card. Resistant is about 2500.
In summary: like a rubber band, stocks tend to snap back to the mean if they've dropped too far from the "fair" value. With that said, if lower stock prices create some values for investors, then, given everything being equal, the market should be able to find some buyers. However, the upside potential seems to be limited, at least for the time being, for it might take quite a bit of time to repair the significant damage that had been done over the past couple of months before we can start to think about getting back to last year's highs. As always we must stress that a failure to bounce after last week steep decline indicates that real demand did not return and we could, therefore, argue that this bear market is going to have some legs.
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.
