Editor's note: this column was originally published on Capital Essence's CEM News on February 26, 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 27, 2008.
Stocks closed higher Tuesday, for the third session in a row, after IBM (IBM), a Dow component, announcement that the company's board of directors authorized an additional $15 billion for its stock repurchase program. The technology sector drafted off IBM's encouraging news with the Nasdaq Composite Index rose 0.75% to finish at 2344.99.
Chart 1.1 – Nasdaq Composite Index (daily).
General speaking, Tuesday trading action was the most positive activity we've seen in several weeks. As a matter of fact, today trading action had confirmed the validity of the "tradable low" scenario that we've pointed out in our weekend "Cubes Speculator Bulletin" when we wrote that: "the medium-term indicators suggested that a tradable low has been established." Any call options traded could have earned about 30% intraday.
Right now, the most obvious level to watch is February high, about 2413. Technically speaking, a walk above this level will trigger all sorts of stops - orders to buy or sell if the market surpasses a certain level. This, if true, will have the potential to propel prices to test a more important resistance plateau at the area of November low, about 2540.
Good news surrounding IBM had helped to carry the Dow higher. The blue-chips index gained 0.91% for the day.
Chart 1.2 – Dow Industrial Average (daily).
We've noted in the previous Market Outlook 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", the blue-chip index did just that Tuesday. While today trading action is bullish, the short-term RSI indicator had entered the overbought territory, so it wouldn't surprise us to see some sorts of profit taking in the upcoming days. The index has a short-term support around the 12400 level. At this juncture only a decline below this level can turn the short-term swing chart down and hence, increase the probability for a retest of key price level around the area of February low, about 12069.
Financial stocks advanced Tuesday after Moody's investor service said it will maintain bond insurer MBIA's (MBI) credit rating. Buying interest in the financial stocks had helped to push the S&P higher. The board market index gained 0.69% for the day.
Chart 1.3 - Standard & Poors 500 Index (daily).
As predicted, price rallied directly into resistant at the area of the 50-day moving average. Not only that this is a tough resistant to overcome, the short-term RSI indicator also entered the overbought territory, so there is a pretty good chance that we'll see some sorts of profit taking in the upcoming days. The index has a short-term support around the 1354 level. While the short-term trend is a little tired, the bears won't have any cases unless they manage to push prices below this level.
From a longer term perspective, it'd be constructive if the bulls able to vault above the psychological 1400 level. As mentioned, a sustain advance above this level will trigger an upside acceleration that should propel prices into the 1450 level.
In summary: while Tuesday trading action should be classified as bullish, the short-term trend is a bit tired and we're, therefore, expecting some sorts of profit takings in the upcoming days. Further, whether the upcoming reversal is merely a pause that refreshes or it's a beginning of something worse is remained to be seen though, for the moment, the bulls still deserve the benefits of the doubts.
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.
