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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Tuesday April 22, 2008.
Yesterday we've said that: "with a majority of short-term indicators suggesting an overbought condition as prices challenging key overhead resistance, we expect the upside momentum will soon start to fizzle out." Stocks ended slightly lower Monday as weaker-than-expected earnings from Bank of America (BAC) gave investors a reason to lock in profits after last week's big advance. Bank of America, US second largest bank by asset size, behind Citigroup (C), was hit hard by the credit market fallout, with profit in the first quarter falling 77% to 23 cents per share from $1.16 a share a year ago. Analysts surveyed by Thomson Financial expected earnings of 41 cents per share. The stock lost 2.7% while the KBW bank index, or BKX, down 2.74%.
Despite the overall weakness, James River Coal Company (JRCC) jumped 11.85% to $25.76, a new 52-week high. Just so that you know, shares of the coal producer gains more than 56% since featured in our March 26 "Swing trader Bulletin" as a potential buy candidate.
Chart 1.1 – James River Coal Company (daily).
Technically speaking, Monday's break to the upside is bullish and suggesting a test of key resistance at the area of 2005 low, about $28.64. Immediate support is about $21.20.
As goes the bank so goes the tape, so to speak. Weaknesses in the financial stocks dragged down the board market with the S&P 500 index gave up about 2 points to finish at 1388.17.
Chart 1.2 – S&P 500 index (daily).
Monday's trading action had confirmed the validity of the "overbought consolidation" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "Friday's massive rally had pushed the S&P directly into the area of overhead resistance. Not only that this is a tough level to overcome, the short-term relative strength index indicator, or RSI, is also indicating an overbought condition. So it wouldn't surprise us to see a correction, which could be either in price (i.e., lower prices) or in time (i.e., basing sideway), in the days ahead." It seems to us that Monday's decline is just a beginning of a modest pullback after last week's huge gain. In addition, volume also low on a down day. This is bullish and suggesting that a test of the 1400 level will be conducted sooner rather than later. As mentioned, this is a very important sentiment level, which needs to be taken out and sustained [on a retest] to confirm that the "low" is already in place. The index has an immediate support around the 1370 level.
The blue-chips index was also under pressure amid bad news surrounding Bank of America, a Dow component. The Dow Jones industrial average lost 24 points to close at 12825.
Chart 1.3 – Dow Jones industrial average (daily).
The index consolidates around the area of "former resistance now support" level (see chart). The relative strength index indicator, or RSI, crossed below the 70 level today. It's indicating that the market had entered an overbought consolidation period. Right now the most obvious level to watch is last Friday's bullish breakout gap, about 12620. This is a very important sentiment level that needs to be held on a retest to confirm last week's rally. Immediate resistance is at the area of 200-day moving average, about 13100 now.
In summary: it seems to us that Monday's decline is just a beginning of a modest pullback, which could lasts about 2 to 7 trading sessions.
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.
