Editor's note: this column was originally published on Capital Essence's CEM News on February 28, 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 29, 2008.
Stocks stumble out of gate Thursday as weak economic and corporate news weighed on the market. The fourth quarter preliminary GDP reading was unchanged from the advanced reading at 0.6% though it was below the Street expectation of 0.8%. New unemployment claims for the week ended Feb. 23 rose to 373,000 from 354,000. The consensus estimate called for a reading of 350,000. General speaking, this increase is not a good economic signal.
Despite the overall weakness, shares of Lifecell Corporation (LIFC) jumped more than 5% Thursday on heavy volume.
Chart 1.1 – Lifecell Corp (daily).
Initially profiled in February 26 "Swing Trader Bulletin", LIFC has gained more than 10% and remains well positioned. Today bullish breakout had cleared resistance at February high. While the short-term trend might be overly extended, a pullback to support at recent bullish breakout point, about $37, will attract buyers. The medium-term outlook remains bullish barring a close below key support at the area of February low, about $35.75.
Financials got hit hard in Thursday sell-off after Fed Chairman Bernanke said before the Senate Banking Committee that smaller U.S banks may fail. The KBW bank index dropped 3.46% for the day.
Chart 1.2 - KBW bank index (daily).
The KBX took an abrupt turn for the worse today. The action had increased the probability for a test of key price level at the area of January low. In addition, the bearish MACD indicator crossover seems to favor the bear case. Right now, we'll have to keep a close eye on the short-term support at February low, about 84. If this goes, we believe that January low would be gone as well. At this juncture, only a sustain advance above Wednesday high at 89.93 can wreck the bearish outlook.
As goes the bank so goes the tape, so to speak. Weaknesses in the financials stocks had dragged the S&P down. The broader market index fell 0.89% to close near its worst level of the session.
Chart 1.3 - Standard & Poors 500 Index (daily).
Looking at the daily graph of the S&P, we can see that price has made a naughty U-turn right beneath the 50 day moving average. While the action is bearish, the bears will not have their case unless they mange to push prices below key support at the area of February low, about 1316. Further, downside volume was just about average and we, therefore, believe that Thursday decline is merely an oversold consolidation. In short, more likely than not, prices will continue to chop sideways before a new catalyst kicks in and push them out of the "stubborn" trading range. Resistance is at the area of 50-day moving average, about 1400.
Strikingly, shares of Apple Inc (AAPL) shook off its long funk on Thursday and jumped to a 3-week high after Tim Cook, the company's chief operating officer helped cool worries about the company's outlook. Speaking at a Goldman Sachs technology conference, Cook reiterated that Apple will meet its 2008 target of selling 10 million iPhones. Despite the good news surrounding Apple, the tech rich NASDAQ Composite index failed to catch a bid, down 0.94% for the day.
Chart 1.4 –NASDAQ Composite Index (daily).
The NASDAQ pushed up against the four-week falling trend-line and, for goodness sake, the trend-line pushed prices back down. While this presents us with a bearish picture, it is short term in nature. Volume was also lower so we think instead of falling through key support at February low, as many market participants believed it would, prices will consolidate around the center of the several week long triangle before some catalysts kick in and push them out of the range. Support is at the area of February low, about 2252. Resistance is at the area of 50-day moving average, about 2420.
In summary: there is no need to sugar coating, Thursday trading action is bearish. Although the market's negative reaction to bad economic news is disconcerting. What really concerns us is the extreme bearish sentiment among market participants – everywhere we go, people are saying the same thing: "look at the chart, the bounce is over! We're due for a third leg down of the bear market!" Thursday downside volume also seems to support the working hypothesis that people are look forward to the "next big drop". And this brings back the old market adage "the watched pot never boils" – especially when things are "too good to be true". In short, until proven otherwise trading range is the name of the game.
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.
