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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Friday April 18, 2008.
Stocks stage a late comeback Thursday with strength in financial and select technology shares helping the Dow erased early losses and closed slightly higher, up about 0.01%. Though do not let the flat tape fool you, today gain is pretty decent considering a massive gain of more than 250 points in previous session. It's bullish and suggesting that the "sell the rally" morality, which was the case in the past couple of months, had been broken. As a matter of fact, today trading session is very consistent to the "bullish" outlook that we've offered in the previous Market Outlook.
Merrill Lynch & Co Inc [MER] was one of the most influential stocks on Wednesday. The firm reported a loss of $2.20 per share, which fell $0.21 short of the consensus earnings estimate. It also announced asset backed security write-downs of $1.5 billion and an additional $3.0 billion in write-downs related to financial guarantees. Despite the announcement from Merrill, brokers and investment banks closed significantly higher with Lehman Brothers Holdings Inc [LEH] up 5%, Citigroup [C], Morgan Stanley [MS] and Goldman Sachs Group Inc [GS] up 2-3%. The KBW bank index gained 1.67% as a result.
Chart 1.1 – KBW bank index (daily).
As you can see, the sector moved higher after the tested of key support around the 74 level was met with an aggressive wave of buying. In fact, the action had confirmed the validity of the "oversold rebound" scenario that we've traced out in the April 15 Market Outlook when we wrote that: "Monday's ugly decline had pushed prices into the area of key support at March low, about 74…the medium-term relative strength index indicator, or RSI, is fast approaching the oversold level, it wouldn't surprise us to see some sort of consolidation around current level."
Technically speaking, while recent trading action is pretty encouraging, it's simply a short-term oversold relieve. With that said, the bulls will not have any cases unless they manage to take out key resistance at the area of the six-month falling trend-line, now at 88. This, if hurdle and sustained, will have the potential to push prices into the area of February's high, about 96.51. Critical support is at the area of March's low, about 73.22.
Speaking of earning rebound, shares of Google Inc [GOOG] soared more than 15% in extended-hours trading after the giant search engine reported sales and earnings that topped forecasts. The NASDAQ 100 is trading well over a full percentage point higher after hours, and the other broad indexes are up as well.
Chart 1.2 – NASDAQ Composite index (daily).
More likely than not, Friday will be a strong day for tech stocks. In fact, the NASDAQ seemed to be hammering out a nice bottoming pattern (see chart). Today's MACD indicator bullish cross only strengthens the bull case – the MACD had not only crossed above its signal line but also trending above the zero line and hence, confirmed the bullish trend. The best case scenario would be an upward push to the area of February's high, about 2419.23. This, if hurdle and sustained, will have the potential to push prices into resistance at the area of the six-month falling trend-line, about 96.51 – though this is not expected tomorrow.
Optimism surrounding financial stocks had helped to push the board market higher with the S&P 500 index gained about 0.06%.
Chart 1.3 – S&P 500 index (daily).
So far so good, the index seems to be ready for a test of key resistance around the 1400 level. In addition, the MACD indicator, which is trending above the zero line, crossed above its signal line today and hence confirms the bull case. Right now the most obvious level to watch is the April 07th high at 1386.74. This, if hurdle and sustained, will trigger all sorts of stops and has the power to fuel a run into the area of November's low at 1406.10. At this juncture, only a sustain decline below Tuesday's low at 1324.35 can wreck the short-term bullish outlook.
In summary: unless there is a headline that everyone recognizes as bearish, Friday will be a strong up day for the bulls.
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.
