Editor's note: this column was originally published on Capital Essence's CEM News on February 12, 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 Wednesday February 13, 2008.
As expected, stocks added on to previous gains thought the rally ran out of steam in the final hour of trading. As a result, the market gave back a large portion of the early gain by the end of the day and remains stuck in the same short-term support zone by the end of the day. Tuesday trading action, as a matter of fact, confirmed the validity of the "range bounce" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "until proven otherwise, trading range is the name of the game."
Contributed to the overall optimism were Warren Buffett offers to reinsure municipal bond holding from MBIA (MBI), Ambac Financial (ABK), FGIC Corp and the White House's "Project Lifeline" which designed to help delinquent homeowners avoid foreclosure. The good news had helped to put a bid in the financial sector. The KBW bank index gained 1.49% for the day.
Chart 1.1 – KBW Bank Index (daily).
Prices continue to base sideway near support. It worth notice that, short-term relative strength index indicator turned bullish today as it crossed above the oversold territory. The action is pretty encouraging. The near-term bias still supports a test of December high, about 100. A sustain advance above 91 will confirm this. Support is about 85.
Commodity, meanwhile, extend its weaknesses with spot gold fell $16.22 to settle at $906.18 an ounce.
Chart 1.2 – World Gold Index (daily).
Gold rolled over today after the test of January high was met with a wave of aggressive selling interest. The fact that the relative strength index indicator stalled at the 70 level suggested that today bearish reversal could be a beginning of a secondary correction. This, if true, will have the potential to push prices to the area of 50-day moving average. A downside follow-through tomorrow will confirm this. Resistance is about 930.
The hope that the worst is behind us had helped to push the Dow above the four-day trading range. The blue-chip index, at its intraday high, gained around 225 points. It was, however, gave back almost half of those gains into the close.
Chart 1.3 – Dow Jones Industrials Average (daily).
The short-term relative strength index indicator turned bullish as it crossed above the oversold territory today. The action is very encouraging. It had increased the probability for a test of the overhead resistant around the area of the 50-day moving average, about 12700. An upside follow-through tomorrow will confirm this. Short-term support is about 12070. At this juncture, only a walk below this level can wreck the short-term bullish outlook and argue for a retest of January low, about 11640.
Chart 1.4 - Standard & Poors 500 Index (daily).
Similar to the Dow, the S&P also broke out above the four-day consolidation pattern. While the action is pretty encouraging, the bulls need to overcome resistance around the area of 20-day moving average before thinking about a run to the 1400 area. Short-term support is about 1320. Bear in mind that a walk below this level will raise the odds for a retest of January low, about 1270.
In summary: while still stuck in the long-term downtrend, the market had produced a marginal positive reading on a short-term basis. So we believe that the "higher low" scenario, that we've discussed right here a couple days ago, had started to gain popularity on the Street. And this suggests that the short-term oversold rebound could turn out to be something bigger.
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.
