Editor's note: this column was originally published on Capital Essence's CEM News on February 24, 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 25, 2008.
Stocks staged an impressive late day come back Friday with the S&P surged about 2% from its session low to close. Contributed to the overall optimism was a report on a potential deal to bail out Ambac Financial Group (ABK), one of two monoline insurers that have been steadily dropping shoes for the past few months. The financial sector had been in negative territory, lost as much as 1.9%, but managed to make a nice gain of 1.6% by the end of the day. As a matter of fact, today trading had confirmed the validity of the short-term "bullish" scenario that we've traced out a couple days ago when we wrote that: "the bears have had every chance to push prices through the February lows, though they couldn't do it because the market was just keep on ignoring bad news. Technically speaking, we think a significant low has been established…. [And] a test of key resistant around the area of February high is, therefore, expected."
Chart 1.1 – KBW Bank Index (daily).
Technically speaking, the near-term outlook remains bullish barring a close below key support at the area of previous bullish breakout point, about $85. It worth notice that, the leading bullish RSI indicator divergence seems favor the bull case. Expect a test of key resistant around the area of February high, about 96, in the upcoming days. An upside follow-though on Monday will confirm this.
Buying interest in the financial stocks had helped to push the S&P higher. The board market index gained 0.79% for the day.
Chart 1.2 - Standard & Poors 500 Index (daily).
Despite what seemed to be a beginning of a downside breakout, the index managed to close around the center of the triangle that it has been building over the past couple of weeks. According to our research, triangles often but do not necessarily resolve in the direction of the prevailing trend. In fact, triangles that formed in a long-term downtrend are prone for a "false" breakout. With that said, while there're often some sorts of short-term follow-through in the direction of the breakout, this short-term movement is often a "false" move and prices will eventually correct themselves.
In addition, the MACD indicator also seems to support the "fake out" scenario. The indicator refused to drop below its signal line in the face of recent weaknesses. This is a short-term plus for the bulls. In short, there is a pretty good chance that we'll see a short-term push toward key resistant around the area of 50-day moving average, about 1400. A sustain advance above Thursday high at 1368 will confirm this. At this juncture, only a sustain decline below key price level around the area of February low, about 1315, can wreck the short-term bullish outlook. Major support is about 1270.
Late day short covering rally in the financial sector had also helped to put in a bid in the blue-chips stocks. The Dow Industrial Average also gained 0.79% to finish at 12381. It worth noticing that the blue-chips index surged more than 200 points from its intraday low to its close.
Chart 1.3 – Dow Industrial Average (daily).
Similar to the S&P, the Dow had also snapped back to the center of the triangle it had been building over the past couple of week. The MACD indicator also turned back up and hence invalidated Thursday sell signal. Again, the action suggests the rebound from February low is still alive and we're, therefore, expecting a retest of key resistant around the area of the falling 50-day moving average. A sustain advance above Thursday high at 12503.46 will confirm this. At this juncture, only a sustain decline below key price level around the area of February low, about 12069, can wreck the short-term bullish outlook. Major support is about 11644.
In summary: technical pressures are building up as the market dances its way into an increasingly tight trading range. Although like all volatility contraction period, the relief valve will eventually have to open. While technical background seems favorable a break to the upside, the manic nature of the market recently suggests that unless there is a significant improvement in the credit markets, the path with least resistant remains to the downside. With that said, if the credits market catch a bid, then we'll see a massive upside move in the financial stocks and this should have enough power to push the S&P toward the key price area around the 1400 level. In the other hand, if the credit markets are getting worse, then a retest of January low, around S&P 1270, is inevitable.
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.
