Editor's note: this column was originally published on Capital Essence's CEM News. It's being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.
Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Tuesday May 13, 2008.
Stocks staged a recovery rally Monday with the Dow gained 130 points or 1.02% to finish at 12876. Contributed to the overall optimism was a falling energy price - U.S. light crude oil for June delivery fell $1.73 to settle at $124.23 per barrel on the New York Mercantile Exchange after settling at a record $125.96 per barrel on Friday. Energy stocks were under selling pressure as a result - the HOLDRS Oil Service ETF (OIH) lost 1.67% to close at $203.49.
Chart 1.1 – HOLDRS Oil Service ETF (daily).
Monday's trading action was pretty consistent to the bearish case that we've offered in the previous Market Outlook: "the sector printed a potential bearish double top pattern on the daily chart. In addition, the MACD indicator is also trending below its signal line since late April. This is bearish and hence increased the odds for a retest of key support at the area of May's low, about 190. This, if violates, will complete the bearish double top pattern and hence indicates that the sector is in a midst of a medium-term correction cycle. A sustain decline below 201 will confirm this." While today trading action is bearish, we'll remain on the sideline until there's a sustain breakdown below the 201 level. Again, at this juncture, only a sustain breakout above this level can wreck the near-term bearish outlook. Key resistance is at the area of April 21st high, about 210.60.
Despite the negative sentiment surrounding the energy stocks, shares of James River Coal Company (JRCC) added on to last week's massive gains, jumped more than 5% to $32.72.
Chart 1.2 - James River Coal Company (daily).
Initially profiled in March 26 "Swing trader Bulletin", shares of the coal producer has gained about 100% and remains well position. Actually, we really like the action over the past few days. Volume has picked up, as prices cut through key resistance at the area of 2005, 2006 lows (see chart). Technically, JRCC remains very strong, but has reached overbought level in all time frames – a situation that precursor to a pullback consolidation period - so it wouldn't surprise us to see some backings and fillings in the days ahead. On a long-term perspective, however, we're still bullish on JRCC and expecting the stock to trend higher. Immediate support is at the area of April's high, about $26.75.
Financial stocks provided leadership in Monday's advance with the KBW bank index gained more than 2%.
Chart 1.3 - KBW bank index (daily).
As a matter of fact, today trading action had confirmed the validity of the "oversold rebound" scenario that we've traced out in the previous Market Outlook when we wrote that: "the short-term RSI indicator is indicated that the sector had reached an extreme oversold condition, so it wouldn't surprise us to see a technical rebound." Technically speaking, the ability to hold above the 50-day moving average is pretty encouraging (see chart) though the bulls will need to overcome the looming seven-month falling trend-line resistance in order to turn the medium-term trend up. That being said, until we see a sustain breakout above May 02nd high at 88.67, the bears shall continue to have the benefit of the doubts. Critical support is at the area of March's low, about 75.
Strength in the financial sector had helped lifting the board market significantly higher with the S&P 500 gained about 15 points or 1.10% to 1403. Though trading volume was pretty disappointed.
Chart 1.4 – S&P 500 index (daily).
The S&P held double supports at the March's trend-line and the April's bullish breakout point, about 1390. This is bullish and helped setting the stage for another test of the looming 200-day moving average, about 1430. This, if hurdle and sustain, will turn the long-term trend up though it's not expected tomorrow. Immediate support is about 1383. As mentioned, a failure to hold above this level will push prices directly into the area of key support at the 50-day moving average, about 1350.
In summary: Monday's trading action is bullish and suggesting further short-term gains. However, the trading volume didn't seem supporting the strong price action. And this is indicating that the upcoming rally, if and when it comes, should be considered as a selling opportunity.
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.
