Editor's note: this column was originally published on Capital Essence's CEM News on February 04, 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 Monday February 04, 2008.
We've offered right here in the previous Market Outlook that: "market is at or very close to its short-term top… since we're in a bear market, the path with least resistant should be to the downside" – stocks stumble out of gate Monday led by the financial and retail groups – two of the best-performing areas last week. Again, the action had confirmed the little "short-covering rally" scenario in these groups that we've traced out a couple weeks ago when we wrote that: "while recent price action [seemed] pretty encouraging, volume had refused to confirm the validity of the bullish breakout. And this suggested that …it was just another bear-market rally."
Contributed to the overall pessimism was UBS' downgrade of several credit card issuers: Discover Financial Services (DFS), Capital One (COF) and American Express (AXP) on concerns about a consumer-led recession. To add the bearish fuel, Merrill Lynch also cut Wells Fargo (WFC) and Wachovia (WB) to Sell. The KBW Bank Index dropped 4.11% on the news. The negative reactions [to the news] indicated that the bearish sentiment among the financials has not appreciably improved.
Chart 1.1: Philadelphia Stock Exchange/KBW Bank Index (daily).
As predicted, the index took a sharp U-turn after a test of the overall resistant around the 100 level was met with an aggressive wave of selling interest. Expect a retest of immediate support around the area of previous bullish breakout point, about 85. A downside follow-through tomorrow will confirm this. Key support is about 75. Resistant is about 100.
"As goes the bank, so goes the tape", so to speak. The S&P gave up 1.05% amid the weaknesses in financial stocks.
Chart 1.2: Standard & Poors 500 Index (daily).
As a matter of fact, Monday's trading action was very consistent to the "bearish reversal" scenario that we've noted right here in the previous Market Outlook: "the board market index rallied directly into the area of former support zone, which is now acting as resistance. While last week's performance had been good for bulls, we believe that higher prices will be met with aggressive sellers – those who brought into the early January's dip are now giving a second chance to sell without incurring a loss. And this will put the brakes on the recovery. Not only is there a tough resistance to overcome, short-term indicator shown that the market is pretty much overbought. The relative strength index (RSI) indicator suggested that the market is at or very close to its short-term top. Once that top is in place, we should be expecting a retest of January's low." And we, therefore, see no reason to abandon the working hypothesis that the lows will be retested. Key support is about 1270. Resistant is about 1400.
Chart 1.3: Dow Jones Industrial Average (daily).
Similar to the S&P, the blue-chip index had also made an ugly U-turn after the test of overhead resistant was met with aggressive sellers. This is bearish. Again, expect a retest of January's low. A downside follow-through tomorrow will confirm this. Key support is about 11640.
In summary: Monday's bearish reversal had not only satisfied but very consistent with the text book " short term rally within the context of a continuing bear market" scenario that we've traced out right here in the previous Market Outlook. How long it lasts is anyone guesses though, as mentioned, we want to see a successful test of January's low before thinking about a new and sustainable rally is in the offing.
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.
