Editor's note: this column was originally published on Capital Essence's CEM News on March 05, 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 Thursday March 06, 2008.
Equity market finished slightly higher Wednesday after a tough session that saw stocks whipsaw around the zero line. Market opened on a positive note Wednesday after a batch of favorable earnings reports and a better than expected ISM Services reading. But the Street struggled after Ambac (ABK) didn't announce a bailout plan as anticipated but instead said it would raise about $1.5 billion through a common stock offering and restructuring of its business. Trading in Ambac shares had been halted ahead of the news, and its stock plunged 15% in the afternoon. Though the bulls were, once again, managed to pull the tape higher by the late afternoon. As a matter of fact, today trading action was pretty consistent to the "positive bias" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "while Tuesday's last-hour buying spike is positive, it doesn't mean that we're out of the woods. Expect prices to chop sideway with a positive bias in Wednesday trading session."
Disappointing news surrounding Ambac dragged on the financial stocks and initially pulled down the KBW bank index. But the index managed to trim a large portion of early loss by the end of the day, down less than 1%.
Chart 1.1 – KBW Bank Index (daily).
Today lack luster performance had not only failed to confirm the validity of Tuesday bullish reversal but also increase the risk for another probe of key price level at the area of January low, about 74.80. Right now, the most obvious level to watch is Tuesday low at 77.64. If this goes, we believe that the January low would be gone as well. Short-term resistant is around the area of February low, about 85.
Meanwhile, a spike in oil prices had helped to put in a bid in the energy stocks. The Amex oil index (XOI) rose 1.98% for the day.
Chart 1.2 – AMEX Oil Index (daily).
Today upside follow-through had confirmed the validity of yesterday bullish reversal bar. The short-term RSI indicator is also crossed above the oversold territory. The action is bullish and suggesting a test of key price level around the 1500 level. At this juncture, only a close below Tuesday low at 1381 can wreck the short-term bullish outlook and hence, increase the probability for a retest of January low.
Optimism surrounding the energy stocks had also helped the S&P to overcome the mid-day weaknesses to finish in the positive territory.
Chart 1.3 - Standard & Poors 500 Index (daily).
Wednesday positive trading action had confirmed the validity of Tuesday bullish reversal bar and we, therefore, see no reason to abandon the working hypothesis that "key resistant around the area of 50-day moving average will be retested sooner rather than later". Short-term support can be found around the 1307 level.
Chart 1.4 – Dow Jones Industrial Average (daily).
Similar to the S&P, the Dow also follow-through to the upside Wednesday and hence confirmed the validity of Tuesday bullish reversal bar. The short-term RSI indicator also tries to move above the extreme oversold level. The action is pretty encouraging and suggesting a retest of key price level around the area of 50-day moving average, about 12535. Short-term support can be found around the 12000 level.
In summary: while Wednesday trading action was positive, it's only a short-term. It does not constitute any valuable information for the medium-term trend. And more likely than not, the sideway trading pattern will continue to hold into the end of the week.
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.
