Editor's note: this column was originally published on Capital Essence's CEM News on March 12, 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 March 13, 2008.
What appeared to be an extension of Tuesday explosive upside move, turned out as a losing session as traders decided to take some profits. Nine of the ten economic sectors trended lower. Some of the largest gainers on Tuesday saw the steepest declines on Wednesday. Financials and homebuilders gave up more than 2% for the day.
Chart 1.1 – PHLX Housing Sector Index (daily).
It seems to be working on a bullish head-shoulder pattern. For starters, this is the most popular chart pattern out there due to the fact that it's very easy to visualize. Right now, the most obvious level to watch is the neckline around the area of early February high, at 157.57. A sustain advance above this level will complete the pattern and have the power to fuel a run into the area of key resistant around the 190 level. Key support is about 123.
Despite Tuesday massive short-squeeze, traders continued to sell financial stocks - a strategy which has worked for two months. The KBW bank index dropped 2.48% as a result.
Chart 1.2 – KBW Bank Index (daily).
Price closed significantly lower after an initial test of key resistant around the 85 level was met with an aggressive wave of selling interest. As a matter of fact, Wednesday trading action had confirmed the validity of the "retest of 50-day moving average" scenario that we've traced out the in the previous Market Outlook when we wrote that: "right now, the most obvious level to watch is the double resistant at the area of the falling 50-day moving average and the late February bearish breakdown point, about 85. This is a very tough resistant, so expect a renewal of selling interest around this area."
While Wednesday trading action is bearish, it's only a short-term reaction. It's too early to tell. We are still essentially at the January low and what we need to see now is either a walk above February high at 96.51, which will break the same downtrend that we've seen over the past couple of months and hence increases the possibility of a sustainable bottom; or a walk below January low at 74.80 - this would at least clear the path for another selling stampede. So until the market shows its true hands, we'll remain patient. Key support is about 75.
As goes the bank so goes the tape, so to speak. Profit taking after Tuesday explosive upside move in the financial stocks dragged the rest of the market down with it. The boarder market S&P 500 index lost about 12 points or 0.90% to 1308.
Chart 1.3 - Standard & Poors 500 Index (daily).
No upside follow-through to Tuesday bullish reversal. While the action is not very encouraging it's not unusual to see some sorts of consolidations after the kind of explosive upside move that we saw yesterday. What we don't want to see right now is a fall back below the 1300 level. This, if happens, will put the market into the same downtrend that we've seen over the past couple of weeks. Right now sideway basing follow by another push upward by the end of the week into the area of the 50-day moving average, about 1360, is the most bullish thing the market can do. While the leading bullish divergence on the On Balance Volume (OBV) indicator seems to support the bullish upside breakout scenario, there are still too many problems on the chart to say that it'd be safe to throw all of the cash into the market right now. Key support is at January low, about 1270.
In summary: after Wednesday lackluster trading action, the question to ask is have we broke the back of the "sell the rally" strategy that has been so successful for the past two months? It might be too early to tell though until traders stop selling financials stocks and/or the market proves that we can hold longer, and Wednesday trading action is indicative that this has not been the case, rallies should be considered as selling opportunities.
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.
