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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Thursday May 15, 2008.
Stocks opened on a positive noted Wednesday in response to a milder-than-expected inflation report and falling oil prices also helped dampen inflation concerns. However, the sense that the market is pretty much overbought in a short-term basis triggered a large-scale sell-off that caused the major indices to give up a great bulk of their early gains. For the day, the Dow Jones industrial average gained 66 points or 0.5% to 12898 - that was about 100 points off its intraday high of 12993. The Standard & Poor's 500 index up 0.4%.
Despite the late-day weakness, shares of Lsb Industries Inc (LXU) held pretty well to the early gain - up 6.52% on strong volume.
Chart 1.1 – Lsb Industries Inc (daily).
Initially profiled in March 25 "Swing trader Bulletin", LXU has gained about 16% and remains well position. Actually, we really like the action over the past few days - volume picked up as prices cut through the March and April highs (see chart). Technically, today's bullish breakout had helped clear the one-week overhead resistance and set the stage for a test of key resistance around the area of the 200-day moving average, about $21. In short, the near term outlook remains bullish barring a close below last week's low at $16.25.
Large-cap tech stocks saw a steeper retreat from their intraday high — after being up 1.3%, the NASDAQ 100 index ETF (QQQQ) ended Wednesday trading session with a 0.22% lost. As matter of fact, today's trading action was pretty consistent to the "fake-out" scenario that we've offered in the previous "Cubes Speculator Bulletin" when we wrote that: "there is a pretty good chance that we'll see a test of January's bearish breakdown gap, about $50, follow by a bearish reversal into the area of 200-day moving average." The stock gave up all of the early gains - it reached as high as $49.93 in early Wednesday trading – and close slightly lower after the test of resistance at the $50 level was met with an aggressive wave of selling interest. Any ATM (at the money) put options traded could have gained at least 100% intraday.
Chart 1.2 – QQQQ (daily).
Price printed a bearish reversal bar right at the area of key resistance. Trading volume also confirmed the validity of today's bearish trading action. Technically speaking, these are bearish signs and suggesting further weaknesses in the days ahead. Immediate support is at the area of 200-day moving average, about $48. This, if violates, will trigger a large-scale sell-off that has the potential to push prices directly into the area the 50-day moving average, about $45.75.
Similar to the NASDAQ, the S&P also printed a bearish shooting star candlestick on the daily chart.
Chart 1.3 – S&P 500 index (daily).
As it was the case in the past couple of days, price dropped hard every time it hit the 200-day moving average, about 1425. So, it seems to us that the 200-day moving average is the line on sand. Also notice that volume picked up today though the real volume surge was due to late-day selling. And again, this is bearish. Right now, the most obvious level to watch is last Friday's low at 1384. As mentioned, a sustain decline below this level will trigger a large-scale sell-off that has the potential to push prices into the area of the 50-day moving average, about 1350.
In summary: Wednesday's trading action is pretty bearish and helped setting the stage for a test of last week's low at S&P 1384, then 1350 afterward. As mentioned, a failure to hold above this level will put an end to the powerful eight-week rally.
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.
