Editor's note: this column was originally published on Capital Essence's CEM News on January 30, 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 31, 2008 .
After all, the Fed gave what the market wanted, which was to cut interest rate by a half-point, dropping the federal-funds target to 3%, putting the rate at its lowest level since June 29, 2005 . Initially, what unfolded seemed pretty typical — the Fed cuts, the market rallies. But it didn't take long before a 200-point rally in the Dow was met with an aggressive wave of selling interest that saw the 30-stock average ended the day 37 points lower. The action was pretty consistent with the "buy the rumor, sell the news" scenario that we've traced out in the previous Market Outlook.
Contributed to the late day selloff was a report that Fitch had cut its rating on the fourth-largest bond insurer FGIC Corporation and its financial guaranty insurance subsidiaries. Financial stocks gave up all of the post FED gains and some more, down 0.26% for the day.
Chart 1.1: KBW Bank Index (daily).
Yesterday we wrote that: "the index broke out above the 50 day moving average today… [Though] volume had refused to confirm the validity of the bullish breakout…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." This was exactly what had happened today – the index moved higher immediately after the FED announcement, then sold off sharply and printed an ugly bearish reversal bar as a result. The argument or logical behind today trading action is pretty simple: in bear market we sell rallies, not buy on weakness.
Technically speaking, today trading action suggested that a retest of this month's low should be unfolded shortly. A downside follow-through tomorrow will confirm this. At this juncture, only a sustain advance above December's high, about 100, on a closing basis can repair the technical damage and hence, reduce the risk of having to retest the floor hit last week. Support is about 74.80.
"As goes the bank so goes the market", so to speak. The negative moves made in the financial stocks dragged the S&P lower, down 0.48% for the day.
Chart 1.2: Standard & Poors 500 Index (daily).
The index printed an ugly bearish reversal bar at the area of key resistant. The action is indicative of a retest of key support at last week's low, about 1270. A downside follow-through tomorrow will confirm this. At this juncture, only a sustain advance above the 1400 can wreck the short-term bearish outlook and hence argue for higher prices.
Chart 1.3: Dow Jones Industrial Average (daily).
Similar to the S&P, the blue-chip index also printed a bearish reversal bar at the area of key resistant. Again, the action suggested that a retest of the floor hit last week will be happened sooner rather than later. A downside follow-through tomorrow will confirm this. Support is a bout 11640.
In summary: the technical background is on the negative side, based on Wednesday's late day massive selloff. And we, therefore, see no reason to abandon the working hypothesis that last week's low will be tested.
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.
