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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday April 28, 2008.
As expected, stocks opened lower Friday though the market managed to overcome early weaknesses to close above the zero line as investors set aside worries about surging energy prices and Microsoft's underwhelming forecast, and picked up a variety of "cheap" financial stocks. For the day, The Dow Jones industrial average added 0.3% to finish at 12891 - its highest close in nearly four months.
Oil reached new record high Friday amid concern that strikes at a BP P.L.C (BP) refinery in Scotland and an unrelated facility in Nigeria could jeopardize production. U.S. light crude oil for June delivery jumped $2.46 on supply concerns to settle at $118.42 a barrel on the New York Mercantile Exchange.
Chart 1.1 – Light sweet crude oil index (daily).
Technically speaking, Friday's break to the upside is bullish. It broke the three-day consolidation pattern and helped setting the stage for a test of an important sentiment 120 level. In short, the medium-term outlook remains bullish barring a close below last Thursday's low at 114.40.
Unsurprisingly, tech stocks were underselling pressure Friday amid weakness in shares of Microsoft (MSFT), which felt more than 6% in response to the lousy fourth quarter forecast.
Chart 1.2 – Microsoft Corp (daily).
As predicted, the stock dropped hard Friday and tested key support around the $29.50 level. While the action is bearish, the late-day upward push suggests that this level might hold for awhile. Expect an oversold consolidation in the days ahead. Critical support is about 28.50. Immediate resistance is about $31.
The financial sector was an outperformed Friday amid an upbeat earning report from American Express (AXP). In addition, shares of Merrill Lynch & Co (MER) also closed significantly higher after the Financial Times reported that Merrill is in discussions with private equity firm TPG regarding possible investments in the investment bank.
Chart 1.3 – KBW Bank index (daily).
The sector has been on better ground for the last couple of days as investors have started to bet that the worst of the credit market crisis is over. It seems poised for a test of key price level at the area of the seven-month falling trend-line resistance, now at 87. At this moment, it's impossible to know for sure whether this level can be taken out or not though a sustain breakout above it will break the "lower highs" pattern going back to October 2007. Critical support remains at 75.
Good news surrounding financial stocks had helped to send the board market higher with the S&P 500 index added 9 points or 0.65% to close at 1397.
Chart 1.4 – S&P 500 index (daily).
Friday's trading action had confirmed the validity of the "sideway consolidation" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "Thursday's trading action didn't have the characteristic of a bullish breakout day – it's rather a continuation the pullback consolidation pattern that starts on Monday April 21st. Of course, this won't last forever though until proven otherwise expect the index to drift sideway within the 1370-1400 trading range."
A milestone here was a crack the old February high at 1396. While the action is bullish, there are quite a number of tough barriers to confront. The first one isn't very far, it's the November's low, about 1406. And even it can overcome that, the 200-day moving average is going to be an even tougher level to encounter. Given the extreme overbought condition, we doubt that the market can overcome it within this rally.
Right now, the most obvious level to watch is the key price resistance at November's low, about 1406. This, if hurdle and sustain on a retest, will break the "lower highs" pattern going back to October 2007 and hence suggesting higher prices heading into the second half of the year. Key support is at the area of 50-day moving average, now at 1345.
In summary: this is decision time for the market. Despite last week's strength, technical evidence favoring both bulls and bears. Given the action in the financial complex of late, it appears that fast money is being put back to work on hopes of a turnaround. This is bullish. However, the bulls have got to pay some respects to the overhead resistance at S&P 1406. Until we see a sustain break above this level on "good" volume, the bears still have the loudest growl.
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.
