Editor's note: this column was originally published on Capital Essence's CEM News on March 06, 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 March 07, 2008.
Stocks stumble out of gate Thursday amid a series of negative reports in the financial stocks. Prior to the open, the Swiss banking giant UBS (UBS) said that it had sold a portfolio of Alt-A securities at distressed prices, which would result in additional write-downs. Merrill Lynch (MER) disclosed it amended the terms of a series of its liquid yield option notes. Shares of Merrill Lynch traded at a new 52-week low. Washington Mutual (WM) was also under-fire after the rating agency Standard & Poor's lowered its long-term counterparty credit rating on Washington Mutual to BBB from BBB+ as well as the long-term counterparty credit rating on Washington Mutual Bank to BBB+ from A-. And unsurprisingly, the KBW bank index dropped 3.61% as a result.
Chart 1.1 – KBW Bank Index (daily).
Price plunged through Tuesday key reversal low. At 76.65, it's less than 2 points to January low. Right now, it's impossible to know for sure whether this level will be taken out or not though a failure to hold above this will trigger all sorts of stops, so to speak, and have to power to push prices into the area of 2003 low, about 65. Key resistant is at the area of February low, about 85.
Crude oil, meanwhile, continue to trade at record levels. Oil prices took out another record high early in the morning, hitting $105.47 per barrel. Crude prices settled modestly higher, up $0.95 to close at $105.47 per barrel.
Chart 1.2 – Light Sweet Crude Oil Index (daily).
Last week bullish breakout had cleared the four-month resistant and set the stage for a test of the next psychological barrier around the 110 level. Technically speaking, the short-term outlook remains bullish barring a close below key support at recent bullish breakout point, about 100.
As goes the bank so goes the tape, so to speak. Pessimism surrounding the financial stocks dragged on the boarder market index. The S&P lost about 30 points or 2.20% for the day.
Chart 1.3 - Standard & Poors 500 Index (daily).
Thursday naughty sell-off had not only pushed prices below key support at February but also through the January closing low at 1310.50. Also notice the leading bearish MACD indicator crossover. The action is outright bearish and suggesting a retest of January low at 1270. Resistance is about 1370.
Chart 1.4 – Dow Jones Industrial Average (daily).
Price plunged through key support at February low though managed to hold above the January closing low at 11971. Right now, keep an eye on this level. If this goes, we believe that the key price level at January low will be gone as well. The index has a layer of support that runs from 111971 to 11634. Resistance is about 12600.
In summary: Thursday trading action had set the stage for a massive move in anticipates of the monthly employment report, which is scheduled to release Friday morning. And since we're still stuck in the bear market, the path with least resistant is, of course, remained to the downside.
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.
