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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Wednesday April 09, 2008.
Stocks stumble out of gate Tuesday with seven of the ten sectors ending the day in negative territory. Contributed to the overall weakness were AMD's profit warning, Alcoa's weak earnings report and the minutes from the last Fed meeting, which showed the central bankers see the economy getting worse going forward. As a matter of fact, Tuesday's trading had confirmed the validation of the "bearish reversal" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "the overbought condition basically sets the stage for a significant reversal."
Despite the overall weakness, shares of Chattem Inc (CHTT) jumped 3.84% to $70.35 on heavy volume after the health care products and personal care supplements manufacturer and marketer reported a better than expected quarter earning. Just so that you know, CHTT was featured in our April 7 "Swing trader Bulletin" as a potential buy candidate. Technically speaking, Wednesday's upside breakout is bullish. It had helped clear the one-month overhead resistance and set the stage for an acceleration run to February high, about $80.
Topping Tuesday headline was news that Washington Mutual (WM) had successfully raising $7 billion though the struggling financial firm is cutting the quarterly dividend to $0.01 per share from $0.15. It's also expects a first quarter loss of $1.40 per share, which falls short of the consensus estimate that called for a loss of $0.49. Shares fell as much as 13% in Tuesday trading. The news dragged on the financial stocks that saw the KBW bank index dropped more than 2% for the day.
Chart 1.1 – KBW bank index (daily).
On the daily chart we can see that not only the sector is no longer overbought, the bulls are doing a very good job secure a majority of last Tuesday's massive gain. This is bullish and suggesting that there is a pretty good chance for a test of resistance at the area of the six-month falling trend-line, about 90. At this moment it's unknown whether this level can be taken out or not though a walk above this level will break the series of "lower-low and lower-high" pattern and hence turn the medium-term trend up. This, if happens and sustains, will be a huge victory for the bulls. Immediate support is about 78.
Let's take a look at the major indices:
Chart 1.2 – Dow Jones industrial average (daily).
The index continues basing sideway right beneath key resistance at 12750. Volume remained low and hence indicated indecision among market participants. The major event here is that Tuesday's decline was pretty modest considering the new wave of bad economic and earning related news. And this is a short-term plus for the bulls. It seems to us that the market wants to move higher and all it needs is a meaningful catalyst. A sustain breakout above the 12750 will confirm this. Immediate support is at the area of 50-day moving average, now at 12380.
Chart 1.3 – S&P 500 index (daily).
Similar to the Dow, the S&P 500 is also drifting sideway right beneath the overhead resistance at the 1387-1406 area as the market works out the overbought condition. This works in the bulls' favor. However, until we see a sustain breakout above the 1406 level, there is no guarantee that the market will not roll over again amid the serve overbought condition. Immediate support is at the area of 50-day moving average, about 1335. Critical support remains at the area of March low, about 1260.
In summary: Tuesday's trading indicated indecision among market participants. With that said, until we see prices breakout from their recent trading ranges, there's a pretty good chance that the market will continue to drifting sideway with a slightly positive bias.
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.
