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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday April 07, 2008.
On Friday, the stock market closed out a strong week on a dull note, ending the day near the unchanged mark. Though don't let the light-volume, low volatility day fool you into thinking nothing happened today. Friday trading action was, in fact, very important considering the big bad job report. According to the US government report, nonfarm payrolls declined by 80,000, which is worse than the expected 50,000 decline. February's decline was revised to 76,000 from 63,000. Manufacturing payrolls fell by 48,000, falling short of the expected decline of 35,000. The unemployment rate ticked up to 5.1% from 4.8%. Economists expected a rate of 5.0%. More importantly, U.S. jobs declined for the third straight month. With all that said, the ability to hang on to last Tuesday's massive gain of 400 points in the face of the disappointing job report is pretty bullish and suggesting that the "sell the rally" mentality, which has been the case since last October, might have been broken.
Despite the flat tape, shares of Titan International Inc (TWI) set a new record high Friday. Shares of the auto parts manufacture advance for fourth consecutive days immediately followed our bullish discussion in the April 2 "Swing trader Bulletin". Technically speaking, Friday's upside breakout is very bullish and helped setting the stage for an acceleration run to the $40 level.
It worth noticing that, the tame job report gave commodities a significant boost that saw spot gold jumped $12.65 to $912.90 an ounce.
Chart 1.1 – World Gold index (daily).
Friday's gain had done nothing to repair the damage done over the past couple of week. As you can see, recent decline in gold prices has been significant as it broke below the 50-day moving average. The action had flipped the medium-trend from up to down. In addition the moving average convergence divergence, or MACD, indicator had not only trending below its signal line but also crossed below the zero line, and hence confirmed the validity of the above medium-term bearish outlook.
However, given that hat long-term bull market in commodity remains intact, traders are looking forward to buy the upcoming dip. And the question is: "what's likely downside target from which the long-term trend can resume?" There area hundred or thousand answers out there though one easy and quite efficient method is to take advantage of the tendency for price to rebound after it had retraced, or pull back, to key moving average. Right now, the most obvious level to watch is the 200-day moving average, about 800 now. This is good place where bargain hunters often place their bets. However, if the buyers do not step in then we'll know that the long-term bull market in commodity might be…over.
Financial sector remained the laggard amid another round of earnings estimate cuts. JPMorgan cut its earnings estimates at Citigroup (C), Bank of America (BAC) and Wachovia (WB). And to add insult to injury, Deutsche Bank reported that they've added JPMorgan Chase (JPM), Citigroup, Sun Trust Banks (STI) and PNC Financial (PNC) to their portfolio as short-term sell ideas. The bank cited continued issues related to increasing credit losses, capital markets dislocations, and revenue growth at the banks. The KBW bank index dropped 2.22% as a result.
Chart 1.2 – KBW Bank index (daily).
Prices still perched just below resistance at the six-month falling trend-line, not at 90. The action is not very encouraging though the bulls will not get into any serious trouble as long prices hold above last week's low at 78.
As mentioned, a bullish breakout above the 90 level will break the long-term down-trend in the financial stocks. This, if happens and sustained, will be a significant victory for bulls. Major support is at the area of March low, about 73.
Despite strength in the materials sector, gained 1.4% Friday and up 6.6% for the week, bad news surrounding the financial stocks dragged on the board market. The S&P 500 index gave back all of the early gain to close around the flat-line.
Chart 1.3 – S&P 500 index (daily).
The index continues to consolidate beneath key resistant level. The action is not very encouraging. In addition, not only that this is a tough level to overcome, the relative strength index, or RSI, indicator is also fast approaching the overbought level, so it will not surprise us to see some sorts of weakness in the days ahead. While seemingly vulnerable for a short-term pullback, the bulls shouldn't get into any serious trouble as long they hold above last week's bullish breakout point, about 1310. Critical support remains at the area of March low, about 1260.
In summary: while the short-term trend remains up, the chart are building on encouraging formations and, most important, the S&P 1400 continues to act as price magnet, the pressure in credit markets could keep buyers at bay. And this will put the lid on the upside. With all that said, until proven otherwise, upside reward could be limited to S&P 1400.
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.
