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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday March 31, 2008.
As expected, stocks opened on a positive note Friday with the Dow Jones industrials jumped as much as 80 points on a better-than-expected snapshot of consumer inflation, though the rally ran out of steam when the market dip into red dye after J.C. Penney (JCP) cut its first-quarter earnings guidance. The stock fell 7.5% to $37.48.
Despite the overall weakness, shares of Cal-Maine Foods Inc (CALM) soared 7.50% Friday on heavy volume. The stock is trading near its all-time high.
Chart 1.1 - Cal-Maine Foods Inc (daily).
Initially profiled in January 14 "Swing Trader Bulletin", CALM has gained more than 60% and remains well positioned. Last Friday massive upside reversal on increasing volume is indicative a retest of key resistance around the $40 level. This, if hurdle and sustained, will trigger an acceleration run to $50. In short, the near-term outlook remains bullish barring a close below key support at the area of previous bullish breakout point, about $31.50.
Retail stocks got hit the hardest in Friday decline amid weaknesses in J.C. Penney with the S&P Retail index lost 2.67% as a result.
Chart 1.2 – S&P Retail index (daily).
Like the rest of the market, overall technical outlook for retail stocks remains bearish for two reasons: first of all, price still traded below the falling trend-line resistance going back to last October. Secondly, the late week's downside follow-through after Monday's failure test of key resistance around the 410 level had raised the odd for a retest of key support the area of March low, about 360.
Although while seems vulnerable for further weakness, the bullish divergence on the MACD indicator at March low is indicative that this support will hold. With all that said, rather than looking at the January and March lows as a double bottom, it'd make sense to consider them as the bottom of a new, wider trading range of 360 and 410.
Bad news surrounding the financial stocks - Oppenheimer & Co. analyst Meredith Whitney said that many banks will likely cut their dividends after reporting first-quarter earnings and stock prices aren't yet fully reflecting the impact of the credit crunch and that bank stocks could lose another 25% - dragged on the board market with the S&P 500 lost about 11 points or 0.9% to finish at 1315.
Chart 1.3 – S&P 500 index (daily).
The market sold off for three straight days and given up most last week's expiration induced gains. As a matter of fact, the action had confirmed the validity of the "consolidation" scenario that we've traced out right here a couple days ago when we wrote that: "the main event here is the upward push against key resistance at the area of the 50-day moving average. Not only that this is a tough resistant to overcome, the trading volumes …are at the lowest level since late February. And this is the exact opposite of what the bulls want to see. With that said, there is a pretty good chance that we'll be getting some consolidation before a meaningful rally unfolds."
Despite the ongoing credit markets turmoil – additional financial-write-down and broker-insolvency rumors, the market managed to close above the 20-day moving average. This is a short-term plus for the bulls. Not only that this is a good support, the short-interest on the New York Stock Exchange and NASDAQ hit record levels in mid-March. At some point, hopefully very soon, short-sellers will start to take their profits and this will set off a chain reaction of buying.
Right now, the most obvious level to watch is Friday low at 1312. This, if exceed and sustain, will trigger a downside follow-through to 1295 and then 1256 thereafter. Short-term resistance is at the area of last week's high, about 1360.
In summary: the market was doing a pretty good job last week on the face of credit market crisis. However, a lack of upside follow-through and a declining volume during rally are indicative that until the market found the needed catalyst to move higher, we are likely to be in a range-bound environment. Hopefully the release of the ever important jobs report on Friday will do the trick.
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.
