Editor's note: this column was originally published on Capital Essence's CEM News on February 14, 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 Friday February 15, 2008.
We've offered right here in the previous Market Outlook that: "the relative strength index indicator suggests that the market is pretty much short-term overbought as prices approaching the overhead resistant. With the February option expiration is only a day away, this lethal combination could put the bulls on the defensive" stocks tumbled Thursday as investors got jittered at the Federal Reserve Chairman Ben Bernanke's bearish testimony when he said that economic conditions are likely to get worse before they get better. He also forecast a further drop in home building and related activities, and said a softer jobs market, higher energy prices and falling home values could be expected to weigh on consumer spending in the near term. And the S&P retail index dropped 2.84% as a result.
Chart 1.1 – S&P Retail index (daily).
Price turned south right at the 50-day moving average resistance. This is bearish and raising the odds for a test of January low. At this juncture, only a sustain advance above the overhead resistant at the area of last December high can wreck the bearish outlook and hence argue for higher prices. Support is about 380-360. Resistant is about 415-445.
Despite the overall weakness, shares of Baidu.com Inc. (BIDU) rose Thursday after the Chinese online search engine operator said its fourth-quarter earnings rose 79 percent as its online marketing revenue jumped. The stock jumped as much $19 or 7.30% before pulled back a bit and settle at $264.50 or 1.30% for the day. Just so that you know, BIDU gained as much as +16% since profiled in our Feb. 11 "Swing Trader Bulletin" as a potential buy candidate.
Chart 1.2 - Baidu.com Inc. (daily).
Today bullish breakout had pushed the stock above the 20-day moving average. This is short-term bullish and suggesting higher prices into the upcoming days. The most obvious level to watch is the overhead resistant around the 300 level. Support is about 220.
Within the tech sector, Intel (INTC) was the main laggard in Thursday decline. The stock down 3.54% on heavy volume after Goldman Sachs removed the company from its Conviction Buy list due to economic concerns. Sliding along with Intel was NVIDIA (NVDA). The graphic chip maker dropped 16.32% after the company reported earnings that upset investors. Their performance had dragged the large cap tech stocks. The Nasdaq 100 underperformed the broader market on a relative basis, finishing 1.8% lower. As a matter of fact, Thursday trading action had confirmed the validity of the "profit taking" scenario that we've offered in the previous "Cubes Speculator Bulletin" when we wrote that: "[the NASDAQ 100 index ETF] QQQQ is fast approaching the profit taking area, so don't be surprise to see some sorts of weaknesses ahead of the weekend." Any put options traded could have earned about 30% intraday.
Bernanke's bearish assessment on the economy dragged down the S&P 500. The board market index dropped 1.34%.
Chart 1.3 - Standard & Poors 500 Index (daily).
The index turned south and ended the day near its intraday low. However, volume was light for the fifth consecutive day. The action is indicative a lack of selling interest and this is not too bad given the short-term overbought condition. Although seemingly vulnerable for further price drops, the bulls shouldn't get into any serious troubles as long as prices hold above the short-term support around the 1320 level. As mentioned, a sustain decline below this level will raise the odds for a retest of January low, about 1270.
Chart 1.4 – Dow Jones Industrials Average (daily).
Similar to the S&P, the blue-chip index also made an ugly U-turn right beneath the area of overhead resistant though on low volume. Again, it seems to us that there was no panic in today price drop. And we, therefore, think downside risk could be limited to February low, at least for the time being. Short-term support is about 12070. Resistant is around the area of the falling 50-day moving average, about 12700.
In summary: Thursday trading action had raised the odds for a retest of February low. In addition, tomorrow is the February option expiration day and like all option expiration days, expect volatility to swing wildly should prices break-away from Thursday's trading range.
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.
