Editor's note: this column was originally published on Capital Essence's CEM News on March 10, 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 March 11, 2008.
Once again, stocks finished near the lows Monday amid a new wave of negative news in the financial market. Citigroup (C) cut its earnings estimates on a number of investment banks. Citi expects $9 billion more mark-to-market write-downs from several major U.S. firms. Countrywide (CFC) and the thrifts & mortgages group got clipped on a report that the company, and 15 other subprime lenders, are under FBI investigation for securities fraud.
Bad news surrounding the financial sector may have weighed on stocks, but that did not stop crude oil from breaking records. Crude oil jumped $2.70 to finish at a record all-time closing high of $107.90 USD per barrel.
Chart 1.1 – Light Sweet Crude Oil Index (daily).
Today trading action is bullish and confirming the validity of a "test of $110 level" hypothesis that we've offered in the March 07 Market Outlook when we wrote that: "short-term outlook remains bullish… the stage had been set for a test of the psychological barrier around the 110 level."
From a near term perspective, while Monday bullish breakout is positive, the upside reward seems to be limited. Also notice the leading bearish divergence on the relative strength index (RSI) indicator. It suggests that price is at or pretty near to its short-term top. Right now, the most obvious level to watch is, of course, the $110 level. A failure to take out this level is outright bearish and suggesting a test of key support at the 100 level.
As goes the bank so goes the tape, so to speak. Problems revolve around worries on margin calls and counterparty risks in the financial stocks dragged on the S&P 500. The board market index lost 20 point or 1.55% to close at 1273.
Chart 1.2 - Standard & Poors 500 Index (daily).
While Monday trading action is bearish, volume remained low. The action is indicative that we're nowhere near the "selling climax" phase. Although, we believe, a drop below January low at 1270 would do the trick.
For starters, it's belief that there are great bargains to be had after the market reached the selling climax. It's because people who wanted to get out of a stock, for any reason (including forced selling due to margin calls), had already sold. Prices should then, theoretically, reverse or bounce off the low. In other words, selling climax is the sign of market bottom.
Right now, keep a close eye on key price level at January low, about 1270. A successful test of this level should have the power to trigger a meaningful counter-trend rally that could last two to seven trading sessions. The index has a short-term resistant around the 1310 level.
Chart 1.3 – Dow Jones Industrial Average (daily).
Similar to the S&P, the Dow is also probing key price level around the area of January low. Volume is a bit higher than usual though remains moderate. At this moment, it's impossible to know for sure whether this level hold or not though a sustain breakdown below it will trigger all sorts of stops, so to speak, and have the power to fuel a decline into the 11K area. Key support is at the area of January low, about 11634. Resistance is about 12600.
In summary: the market is becoming deeply oversold as prices probed key support levels. Past experience shows that until the market reached or going through the "selling climax" phase, oversold condition can become even more oversold. Although if history is any guidance, expect an overshoot to the downside follow by a sharp upturn that has the potential to initiate a strong counter-trend rally.
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.
