Editor's note: this column was originally published on Capital Essence's CEM News on March 09, 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 Monday March 10, 2008.
Friday's worse than expected monthly jobs report sent stocks significantly lower in a volatile session that saw the Dow Industrials slip below 12000 - its lowest close for the index since August 2006. The trading action was, in fact, pretty consistent to the "retest of January low" hypothesis that we've offered in the previous Market Outlook when we wrote that: "the stage had been set for a massive move… since we're still stuck in the bear market, the path with least resistant remained to the downside."
It worth notice that the financial sector finished the day as a relative leader, the KBW bank index gained 0.56%, thanks to the news that in a move to improve liquidity, the Fed had increasing the size of its Term Auction Facility (TAF) to $100 billion.
Chart 1.1 – KBW Bank Index (daily).
The main event here is a plunge through January closing low at 77.59. While the action is bearish, the leading bullish divergence on the On Balance Volume (OBV) indicator suggested that the sector is at or pretty near a short-term tradable low. A sustain advance above 78 will confirm this and a retest of key price level around the 85 level is, therefore, expected. Immediate support is about 74.80.
The late-day quick surge in buying interest in the financial sector had helped the S&P to recover a large portion of the early losses. The board market index lost about 10 points to close at 1293.
Chart 1.2 - Standard & Poors 500 Index (daily).
Price followed through to the downside and hence confirmed the validity of last Thursday's bearish breakout. At 1293, the index is about 23 points or 2% to January low at 1270.05. Right now, it's impossible to know for sure whether this level will be taken out or not though a failure to hold above it will trigger all sorts of stops, so to speak, and have to power to push prices into the area of 2006 closing low, about 1223.
Also notice that the short-term relative strength index (RSI) indicator is really quite depress, and we're not surprise to see some sorts of short-covering bounce in the upcoming days. Though, this is believe to be short-term and will be followed by even more selling. Key resistant is at the area of the falling 50-day moving average, about 1370.
Chart 1.3 – Dow Jones Industrial Average (daily).
Price plunged through key support at the area of January closing low at 11971. While the action is outright bearish, the short-term RSI indicator is indicative that the oversold sentiment is really quite depressed and, as noted above, we won't be surprise to see some sorts of short-covering bounce in the upcoming days. Key support is at the area of January low, about 11634. Resistance is about 12600.
In summary: technically speaking, the oversold sentiment is pretty depressing and we're due for a short-covering bounce but, we believe that, the bear market is nowhere near the end and rallies should be looked at as an opportunity to sell stocks.
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.
