Editor's note: this column was originally published on Capital Essence's CEM News on February 13, 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 February 14, 2008.
Stocks added on to previous gains to finish near their highs. Strikingly, each of the major indices posted gains in excess of 1% and all ten economic sectors finished in positive territory. As a matter of fact, Wednesday trading action had confirmed the validity of the "bullish" scenario that we've offered right here in the previous Market Outlook when we wrote that: "while still stuck in the long-term downtrend, the market had produced a marginal positive reading on a short-term basis…this suggests that the short-term oversold rebound could turn out to be something bigger."
Contributed to the overall optimism were the good news on the retail front and assurances from Treasury Secretary Paulson when he said that that if the economy becomes worse, the government would discuss further stimulus measures.
The bullish retail readings had not only cools the recessionary talks but also helped to put a bid in the "depress" financial sector.
Chart 1.1 – KBW Bank Index (daily).
While still stuck in an ugly down-trend, the bank index had developed some sorts of short-term bullish readings which suggest that a reversal condition is at hand. It seems to us that the pullback from February high at 96.12 into this week low at 86.06 is completed. And we, therefore, see no reason to abandon the working hypothesis that the overhead resistant at the area of December high, about 100 will be retested.
The Banking Index's positive development had helped to push the S&P 500 index higher because, after all, 20% of its components are financially related stocks.
Chart 1.2 - Standard & Poors 500 Index (daily).
As expected, the bulls managed to overcome resistant at the 20-day moving average. This is bullish and suggesting that we'll see higher prices in the upcoming days. The most obvious level to watch is the overhead resistant around the area of the "falling" 50-day moving average, about 1400. At this moment, it's impossible to know for sure whether this resistant can be taken out or not though a walk above this level will complete the bullish "higher low" pattern, so to speak, and hence, turn the medium-term trend up.
Although seemingly bullish, the short-term relative strength index indicator suggests that the market is approaching a short-term overbought condition yet again, so we wouldn't surprise to see some attempts to sell the rallies in the upcoming days. However, the bullish shouldn't get into any serious trouble as long as prices hold above the short-term support around the 1320 level. As mentioned, at this juncture, only a sustain decline below this level can wreck the short-term bullish outlook and raise the odds for a retest of January low, about 1270.
Signs of market stabilization had helped blue-chip stocks to finish the day as a relative leader. The Dow Jones Industrial Average rose 1.45% for the day.
Chart 1.3 – Dow Jones Industrials Average (daily).
Similar to the S&P, the blue-chip index is also working on the bullish "higher low" pattern. While holding firm to the expectation of a test of resistant around the area of 50-day moving average, we're also keeping an eye on the exit door. Short-term support is about 12070. As noted above, at this juncture, only a walk below this level can wreck the short-term bullish outlook and argue for a retest of January low, about 11640.
In summary: the relative strength index indicator suggests that the market is pretty much short-term overbought as prices approaching the overhead resistant. With the February option expiration is only a day away, this lethal combination could put the bulls on the defensive side.
Until next time, good luck.
(By: Michelle Mai for Capital Essence)
(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.
