Editor's note: this column was originally published on Capital Essence's CEM News on February 09, 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 11, 2008.
As predicted, stocks ended a rough week on Wall Street in a negative note with the Dow lost about 0.50% Friday. Contributed to the overall weaknesses was a higher energy prices. And, unsurprisingly, energy stocks were the day's relative leaders as a result. The March delivery crude oil jumped $3.66 to settle at $91.77 a barrel on the New York Mercantile Exchange after OPEC reported that it will cut output to prevent prices from falling below $80 per barrel. As a matter of fact, the trading action was very consistent to the little "oversold bounce" scenario that we've traced out right here a couple days ago when we wrote that: "oil is pretty much oversold on a short-term basis, so we wouldn't surprise to see some kind of attempt to buy-the-dip in the upcoming days."
Chart 1.1 – Light Sweet Crude Oil Index (daily).
The commodity bounced off support at the area of 100-day moving average as it works off the short-term oversold condition. While the action is pretty bullish, still, we believe that the near-term highs are "in". Resistant is at the around of January highs, about 100. Support is about 85.
Hurt by higher energy prices, the transports gave up some of Thursday gains, down 0.95% to 4711.
Chart 1.2 – Dow Jones Transport Average (daily).
The index reclaimed the medium-term support at the area of 50-day moving average since bottomed out in mid-January. It is currently challenging the long-term overhead resistant around the 200-day moving average. Not only this is a tough resistance to overcome, relative strength index (RSI) indicator shown that the group is pretty much overbought, so we wouldn't surprise to see prices move sideways or even down a bit in the upcoming days. However, the long-term price pattern seems very promising. There is a pretty good chance that we'll see an ultimate test of the all-time high recorded last July. Support is at the 50-day moving average, about 4550.
Meanwhile, worries about the fallout in the bond insurance market dragged down the financial sector with the KBW Bank Index dropped 2.30% for the day.
Chart 1.3 – KBW Bank Index (daily).
As expected, the index consolidates or basing sideway around the area of 50-day moving average as it works off the Fed-induced overbought condition. The action is pretty encouraging, at least in a short-term. With that said, the bulls shouldn't get into any serious troubles as long as the banks hang above its January low, about 74.80. Short-term resistant is around the 100 level.
"As goes the banks, so goes the tape" so to speak, the S&P lost about half a percentage point to close at 1331.
Chart 1.4 - Standard & Poors 500 Index (daily).
As expected, the board market index is trying to establish a base around the area of January closing low. The relative strength index (RSI) indicator shows that the market is pretty much oversold on a short-term basis; and we're, therefore, expecting an oversold rebound in a next couple of days. Support is at the area of January low, about 1270. Resistant is about 1400.
Chart 1.5 – Dow Jones Industrials Average (daily).
Similar to the S&P, the blue-chip index is also oversold in a short-term basis so it wouldn't surprise us to see some sorts of technical rebound in the upcoming days. Support is around the area of January low, about 11640. Resistant is about 12700.
In summary: while still stuck in the long-term downtrend, the market is pretty much oversold in a short-term basis, a situation that, often, precedes a technical rebound. However, the upside potential seems to be limited, at least for the time being, because it might take quite a bit of time to repair the significant damage that had been done over the past couple of months before we can start to think about getting back to last year's highs. In short, it'd be wise stay defensive until the bulls manage to overcome the overcome the S&P 1400.
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.
