Editor's note:
this column was originally published on Capital Essence's CEM News on January 16, 2008. 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 Thursday January 17, 2008.
Stocks tumbled Wednesday, immediately after our
bearish comment, gave up most of the early gains and some more amid recession concerns.
For the day, the Dow Jones industrial average lost 0.3%.
The broader market index, S&P 500, lost 0.6% to finish at a fresh 10-month low. The NASDAQ Composite fell 1%.
Despite the overall weakness, the Bank Index ($BKX) reversed it course of action, gained 2.42% for the day.
As a matter of fact, today's trading action was very consistent with our previous
bullish comment on the group. Contributed to the overall optimism was the "better than feared" earning report from JPMorgan Chase & Co (JPM) – after all, it "only lost 1.3 billion" in bad mortgage debts.
The stock jumped 5.77%, while the Financial Sector Select SPDRs ETF (XLF) gained 1.68% on the report. Clearly, JP Morgan news caused some short covering activities in the group.
Remember, the Street is net short financials.
Chart 1.1: Bank Index (daily).
The index printed a bullish double bottom pattern around the area of long-term support, about 80. This is bullish. Technically speaking, today's trading action had increased the probability for a test of late December's bearish breakdown point, about 90. Although bear in mind that this [upcoming rally] is depended upon Merrill Lynch (MER) fourth quarter earnings report, which is scheduled to release before Thursday's open.
Chart 1.2: Merrill Lynch & Co Inc (daily).
As noted above, Merrill Lynch's earning report is the main catalyst for Thursday's trading action. The stock had rallied directly into key resistant around the area of 50-day moving average head of the news. At this moment, it's unknown whether this level holds or not, though a sustain advance above it will trigger all sort of stops and hence increases the probability for a test of December's high, about 63. In short, the technical background, while ambiguous, doesn't look that bad – noted the bullish MACD divergence at recent low. Although, bear in mind that, a sustain rally needs more than a simple MACD divergence. It needs a right catalyst. Hopefully tomorrow earning report can give the bulls a good reason to get their groove back. Support is at last week's low, about 47.50.
Chart 1.3: Standard & Poors 500 Index (daily).
Despite the strength in the financial stocks, the S&P wasn't able to hold on to early gain.
The board market index followed through to the downside and closed around the area of August's low.
This is not very encouraging.
As
mentioned, a sustain decline below this level on a closing basis is indicative that the 2002 cyclical uptrend in the
US equities market is over.
So keep a close eye on this.
Short-term resistant is about 1400.
Chart 1.4: Dow Jones Industrial Average (daily).
Similar to the S&P, the blue-chip index also followed through to the downside Wednesday. While the decline was pretty small, the trading volume is screamingly high – it's about two times the daily average. The action, while ambiguous, had the characteristic of "institutional repositioning" – smart money or the well informed group re-positioned [for a tougher time]. This, if true, suggested that we're only mid-point to the downside. Support is at the area of spring 2007's low, about 12000. Short-term resistant is about 12930.
In summary: the recent trading action in the financial stocks is pretty encouraging. It had increased the likelihood that the group will shoot straight up for the remaining of the month. Though this, as noted above, is depended upon Merrill Lynch's ability to recapture investors' love when it reports the fourth quarter earning Thursday morning.
Until next time, good luck.
(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.
