Editor's note: this column was originally published on Capital Essence's CEM News on March 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 Friday March 14, 2008.
Stocks staged an impressive come back Thursday, the market was down as much as 2.0% in the opening minutes, after Standard and Poor's call that an end to mortgage write-downs is in sight gave investors a reason to scoop up shares hit in the recent market selloff.
The financial sector saw the largest boost from the S&P comments. The sector was down as much as 4.0% on renewed credit concerns due to reports that a Carlyle Group fund is close to collapse.
Chart 1.1 – KBW Bank Index (daily).
It seems to us that the index had successfully tested key support at the area of the weekly low. While the action is bullish, we need to see a push above key resistant at the area of the falling 50-day moving average before thinking about dipping our toes into this sector. Key support is about 75.
Optimism surrounding the financial stocks had helped to push the board market higher. The boarder market S&P 500 index gained about 7 points or 0.5% to 1315.
Chart 1.2 - Standard & Poors 500 Index (daily).
Even after Thursday comeback, we're still essentially traded below key price level at February low and the 20-day moving average. While the action is not very encouraging, the leading bullish divergence in the relative strength index (RSI) indicator is suggestive of an impending rebound. With all that said, there is a pretty good chance that we'll see another push upward into the area of the upper level of the two-month trading range, about 1390, in the upcoming days. Key support is at January low, about 1270.
Held back by weakness in American international Group (AIG), the insurer was downgraded to Equal-Weight from Overweight at Morgan Stanley, the blue-chip index closed slightly above the zero line, up 35 points or 0.29% to 12145.
Chart 1.3 – Dow Jones Industrial Average (daily).
After the weak opening, the index ended the day nearly 300 points above its intraday low. While the action is encouraging, the question to ask is whether the rally will proceed beyond this point. For this, the leading bullish divergence in the relative strength index (RSI) indicator seems to support the bullish breakout scenario. An upside follow-through tomorrow will confirm this and hence increases the probability for a test of the upper level of the two-month trading range, about 12700. Key support is about 11634.
In summary: it seems to us that the market is waiting for a meaningful catalyst to move higher. Hopefully the February CPI, which is schedule to release Friday morning, would do the trick. With that said, a better than expected CPI reading would trigger another short-covering rally, which has the potential to fuel a run above key resistant at the area of the 20-day moving average.
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.
