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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Wednesday January 30, 2008.
Equity market picked up where it left off yesterday, rallied for the second session in a row as investors cheered the better than expected durable-goods orders and some upbeat earnings.
As
predicted, homebuilders outperformed the market as the group continued to attract bottom-fishing interest.
The PHLX Housing Sector Index (HGX) jumped 2.92% and is now in a plus column for the year.
Chart 1.1: PHLX Housing Sector Index (daily).
The index seems to move well on the
expected direction –
a test of resistant at the area of December's high, about 155, should be conducted sooner rather than later.
As mentioned, it's unknown whether this level holds or not though a walk above this level will turn the medium term trend up and hence suggests a test of resistant around the area of the 200-day moving average.
Support is about 127-117.
Once again, the positive trading action in the housing sector had helped lifted financial stocks. The KWB Bank Index (BKX) rose more than 2% today on the face of a cautious 2008 outlook from American Express (AXP) and chatter that the ratings agencies are poised to downgrade the bond insurers.
Chart 1.2: KBW Bank Index (daily).
The index broke out above the 50 day moving average today. While the price action is pretty encouraging, volume had refused to confirm the validity of the bullish breakout. And this suggested that we should not put a lot of reading into today's trading action - after all, it was just another bear-market rally. As mentioned, we want to see "real demand" returns before thinking that the bear has bottomed. Key resistant is at the area of December's high, about 100. Support is about 74.80.
General speaking, the financials rebound had breathed life into the market. The S&P closed near its best level of the day, up 0.62%.
Chart 1.3: Standard & Poors 500 Index (daily).
Despite today gain, the board market index still trades below the 2007's closing low as resistant. The action is bearish. A sustain decline below 1322 indicates a retest of last week's low, about 1270. Short-term resistant is about 1374. Key resistant is at the area of 50-day moving average, about 1415.
Chart 1.4: Dow Jones Industrial Average (daily).
The blue-chip index had rallied directly into the short-term resistant around the 12500 area. Trading volume seems to support the bearish bets. Expect a retest of key support around the area of last week's low, about 11640. A decline below 12112 tomorrow will confirm this. Key resistant is at the area of 50-day moving average, about 13000.
In summary: the market had done a pretty good job walking its way back to key price levels. However, a lack of real demand in the heavy short areas such as financials and homebuilders remains a major concern as we're heading into Wednesday's market mover. Speaking of mover, the FOMC announcement on interest rate tomorrow will be the center of attention. The Street expected a 50 points cut from the FED. It's widely believed that a 25 points cut would be a real disappointment. While it's impossible to know how much the FED is going to offer tomorrow, we believe that there's a pretty good chance that the market will ultimately retest the "floor" hit last week, to determine whether a sustainable rally is in the offing. With that said, the rally is merely an attempt to game the FED ahead of time — buy on the expectation of a big rate cut, sell when the cut comes through.
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
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