Editor's note: this column was originally published on Capital Essence's CEM News on February 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 Thursday February 07, 2008.
As predicted, equity market closed on its lows for the third day in a row with the Dow dropped another 65 points on the heel of Tuesday loss of 370 points.
Strikingly, the energy sector took the biggest beat on Wednesday with crude oil plunged 1.5% to $87.14 per barrel amid the bearish inventory report – the Department of Energy reported a larger than expected inventory that saw crude stockpiles rose 7.05 million barrels versus an expected build of 2.6 million barrels.
Chart 1.1 – Crude Oil Index (daily).
The commodity is pretty much oversold on a short-term basis, so we wouldn't surprise to see some kind of attempt to buy-the-dip in the upcoming days. Still, we believe that the near-term highs are "in" even if the US economy can escape the recession. Resistant is at the around of January highs, about 100. Support is about 85; then $78.
Helped by lower energy prices, transportation stocks caught quite a numbers of bids Wednesday with the Dow Jones Transport Average gained 0.28% for the day.
Chart 1.2 - Dow Jones Transport Average (daily).
The group had cleared the former overhead resistant at the area of 50-day moving average after bottoming in January. While the action is technically constructive, the bulls will not have any cases unless they manage to push prices above the 5000 level. Immediate support is at the area previous bullish breakout point, about 4300.
From a long-term perspective, the recent upturn in the transports is very promising. It suggests that we could be close the end rather than the beginning [of a slow down] because, this is one of those sectors that do best coming out of a recession.
Back to the short-term analysis, with the major indices closing near their worst levels of the day, Wednesday's session can be labeled as "terrible" by the bulls.
Chart 1.3 - Standard & Poors 500 Index (daily).
The index seems to move well on the expected direction. Again, the January low on the S&P is about 1270. At 1326, we're about 4% away from it. The relative strength index (RSI) indicator suggests that we're pretty close to the short-term oversold territory, so it would not surprise us to see some kind of attempt to establish a higher low in a next couple of days.
Chart 1.4 – Dow Jones Industrials Average (daily).
Similar to the S&P, the blue-chip index had also done a pretty good job as it worked off the Fed-inspired overbought condition. At 12200, we're about 600 points away from the January low. With the relative strength index (RSI) indicator is getting pretty close to the oversold territory; the question to ask is whether the lows are "in"? Technically speaking, since we are in a bear market, the retest is likely to fail. However, nothing moves in a straight line, so we wouldn't be surprise to see some sorts of volatile swings and sharp intraday reversals in a next couple of days.
In summary: it'd be useful to recall the old adage that says the watch pot never boils. As far as we can see, the selling in the past couple of days seems to be fairly orderly, without a lot of stress and/or panic. This suggests that traders are really believed that the "lows" are "in". Students of the market know that bull market arises from the ashes of the bears. With that said, bottom won't form unless the last bear had finished pressing the sell button. Expect things to get very "interesting" if the retest fails! In short, the "unfavorable volatility" in equities should keep the bulls on the defensive, at least for this week.
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.
