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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Friday April 25, 2008.
Stocks closed higher across the board Thursday with the Dow Jones industrial average added around 0.7% to finish at 12848 and the broader, Standard & Poor's 500, index added 0.6% - the S&P posted a much bigger gain, reached as high as 1397 in the early afternoon – to close at 1388. As matter of fact, today trading action was very consistent to what we've offered in the previous Market Outlook: "the S&P seems poised for a test of an important psychological level, around the 1400 area. However, the wobbly readings from indicators like the short-term slow stochastic suggest that, more likely than not, this test is going to fail."
Contribute the overall optimism were a stronger dollar and upbeat earnings from Ford Motor Co (F) and Apple Inc (AAPL). Speaking of earning, shares of Microsoft Corp (MSFT) were under selling pressure, down almost 4% in Thursday evening trading, after the world's biggest software maker reported a rise in earnings that beat expectations but its outlook disappointed investors.
Chart 1.1 – Microsoft Corp (daily).
Do not let the above chart fool you, the stock down about 4% to about $30.20 in after hours trading. Technically speaking, the major resistance at November-December's low, about $32.63, had been a very important line in the sand. And despite Thursday's strength, the line remains untouched! This should tell us the strength of the stock going into this evening earning report – very weak, of course! In addition, the short-term RSI indicator is indicating that the stock is extremely overbought – a condition that's also precursor to a pullback consolidation. So, it wouldn't surprise us to see a test of immediate support at previous bullish breakout, about $29.50, in the days ahead.
It worth noticing that a stronger dollar has triggered an interesting market rotation: money is coming out of commodities and commodity related stocks and going into financials and home builders. The PHLX Housing Sector Index rose more than 3% while the Amex Gold Bugs Index dropped more than 4% as results.
Chart 1.2 – PHLX Housing Sector Index (daily).
The housing is doing very well, up about 13 points or 10% immediately followed our bullish comment on the sector on March 12. While Thursday's trading action is bullish and suggesting further short-term gain, the upside could be limited to February's high, about 157. What's going on? As you can see, we've approached this level and failed at least three times since last December – a lot of good money have been burned at this level before and there is no clear evidence that suggests it won't happen again. With that said, from a long-term perspective, the bulls will not have any cases unless prices break above the 157 level. This, if clear and sustain, will break the pattern of lower lows that goes back into early 2006 and help setting the stage for s test of 2006 low, about 190.
As noted above, the bullion took a beating Thursday amid a stronger greenback. In fact, recent trading action had confirmed the validity of the "short-term bearish" scenario that we've offered in our April 21 Market Outlook when we wrote that: "Friday's [April 18th] break to the downside had completed the bearish lower-high pattern. In addition, the on balance volume indicator, or OBV, also traded below its 20-period moving average and hence confirmed the bearish trend…expects further short-term losses."
Chart 1.3 – Amex Gold Bugs Index (daily).
Thursday's massive sell-off had pushed prices into key support at the area of the 200-day moving average. Not only that this is a pretty strong support – it's good place where bargain hunters often place their bets – the short-term RSI indicator is also indicating an extreme oversold condition. So, it wouldn't surprise us to see a technical rebound in the days ahead. Immediate resistance is about 425.
Heavy buying interest in the financial and home builder stocks had helped to push the board market higher. The S&P up about 9 points to 1388.
Chart 1.4 – S&P 500 index (daily).
As expected, the index tested the important psychological 1400 level today. Not only that it failed to close above this level – this is also expected – Thursday's trading volume was not very encouraging; it's just about average. Technically speaking, today 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. As mentioned, it's critical that price stays above the 1370 level. This, if violate and sustain, will increase the odds for a retest of the 50-day moving average, about 1345 now.
In summary: while Thursday's trading action is bullish, it doesn't have the characteristic of a "bullish breakout" day. In short, it's good but no firework!
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.
