Editor's note: this column was originally published on Capital Essence's CEM News on March 15, 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 March 17, 2008.
As expected, equity market opened on a positive note Friday amid the better than expected CPI data. The tone was, however, quickly turned negative when Bear Stearns (BSC) announced its liquidity had deteriorated severely and rapidly. Sellers took over the market immediately followed the announcement. As a result, each of the major indices finished at least 2% lower for the day.
Despite the overall weakness, shares of Ariba Inc (ARBA) jumped more than 11% last week on heavy volume.
Chart 1.1 – Ariba Inc (daily).
Initially profiled in the March 10 "Swing Trader Bulletin", ARBA has gained more than 10% and remains well positioned. As a matter of fact, last week bullish breakout had cleared resistance at the three-month bearish trend-line and set the stage for a test of key price level around the area of January high, about $10.50. From a longer term perspective, the outlook remains bullish barring a close below key support at the area of March low, about $8.40.
After last week wild trading action, the question to ask remains "is the market out of the wood yet?" And for this we have a couple of simple charts to follow:
One of the most popular chart patterns that everyone has been watching during the last couple of weeks is the bullish double bottom on the S&P.
Chart 1.2 – S&P 500 index (daily).
For starters, double bottom, or "W" pattern, occurs when price makes two significant and similar lows within a short period of time follow by a small rally that push price to above the peak of the second low. This, if happens, will complete the pattern and further gains can be expected.
However, the problem is that the neckline resistant, about 1400, has not been broken to the upside. Further, in contrast to last Tuesday strong advance, Friday bearish reversal had put the bears back into the driver side of the market. What the bulls want to see next is that the low, at 1270, isn't violated and a sustain advance above the neckline resistance around the 1400 level.
While the short-term price chart seems vulnerable for further decline, the medium-term breadth indicator suggests that the market might have put in an important low is place though it is still in an early state of healing process.
Chart 1.3 – S&P 500 medium-term breadth indicator.
The really bullish significance of the above breadth indicator is that the market put in an important low (the green bars on the upper price panel) almost every time the indicator traded below the oversold level. Also notice the leading bullish divergence at recent low. This provides us with a higher probability that the low will hold.
In addition, while investor's sentiment measure has been negative for some time, it is now showing real fear. According to the Investor's Intelligence survey of newsletter editors, the number of bullishness had reached a historically low numbers: 31.1% - the lowest since October 2002 and early 1995. General speaking, this is usually a fantastic contrarian indicator since editors tend to be panic when the market is carving out a bottom, just as they tend to be euphoric at market top.
In summary: while the medium-term indicators covering breadth and sentiment are indicative that an important bottom is in the making, the real bull/bear decision may not come out until the calendar turns to April.
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.
