Editor's note: this column was originally published on Capital Essence's CEM News on February 25, 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 Tuesday February 26, 2008.
Stocks staged another impressive late day rally Monday after Standard & Poor's reiterated its top rating for Ambac Financial Group (ABK) and took rival MBIA Inc (MBI) off its credit watch list, soothing worries about problems for the bond insurers spreading to the broader market. Shares of these two monoline insurers soared 15.87% and 19.70% respectively on the news. For the day, the Dow Jones Industrial Average added 1.5%; while the Standard & Poor's 500 Index gained 1.4%. It worth notice that, Monday gains marked the best percentage gains for both of these major market indices this month. In fact, today trading action had confirmed the validity of the "massive move" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "if the credit markets 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."
Chart 1.1 – KBW Bank Index (daily).
Today's upside follow-through of last week rally has positioned the price structure for a test of key price level around the area of February high, about 96. Needless to say, the action is bullish and very consistent with the short-term "bullish" scenario that we've offered right here in the previous Market Outlook and we, therefore, see no reason to abandon this working hypothesis unless there is a close below key support at last week low, about 85.
Despite worries about deteriorating earnings prospects for the financial sector that were touched off after Goldman Sachs (GS) lowers its first quarter earnings estimates on a number of investment banks, the S&P held up very well in Monday's trading.
Chart 1.2 - Standard & Poors 500 Index (daily).
Price rallied directly into resistant at the area of the triangle's upper border. The short-term RSI indicator is fast approaching the overbought territory, so there is a pretty good chance that we'll see an upside push that could propel prices into the area of overhead resistance around the 1400 level before the rally runs out of steam. From a longer term perspective, it'd be very constructive if the bulls able to vault above this reaction high. Again, 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 and hence increase the probability for a retest of major support at the area of January low, about 1270.
It worth notice that of the ten economic sectors finished higher, material is the only sector achieves a positive year-to-date gain, up about 0.6%. Shares of Alcoa (AA), a Dow component, jumped 6.29% Monday after the sense that "aluminum is as good as gold" returns. The stock provided materials with leadership. Optimism surrounding Alcoa had helped to push the blue-chips index higher.
Chart 1.3 – Dow Industrial Average (daily).
As predicted, the index is heading toward the double resistant around the 12700 level. At this moment, it's unknown whether this level can be taken out or not, though clearing this area is a must in order for the bulls to establish a pattern of higher-highs. Again, 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 and hence increase the probability for a retest of major support at the area of January low, about 11644.
In summary: it seems to us that the stage had been set for a strong countertrend rally that has the potential to propel the major indices into the area of 50-day moving average. As noted above, we'd view a sustain breakout above this level as constructive because it'll trigger all sorts of stops, so to speak, and hence, increases the probability for a test of last December high.
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.
