Editor's note: this column was originally published on Capital Essence's CEM News on March 11, 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 Tuesday March 11, 2008.
As predicted, equity market bounced off the deeply oversold level Tuesday on the announcement of a coordinated central bank effort to increase liquidity in the financial markets. Broad-based buying interest sent the major indices sharply higher, as they closed at their session highs.
Of the nine economic sectors finished higher, tech saw a steepest rise. The sector managed to shrugged off the bearish news surrounding Texas Instruments (TXN), which traded significantly lower due to the company's lower than expected earnings guidance, to close up 4%.
Speaking of tech stocks, Tuesday trading action was pretty consistent to the "technical rebound" scenario that we're traced out in the previous "Cubes Speculator Bulletin" when we wrote that: "while a majority of short-term indicators are pointing to the downside, the medium-term price chart is suggesting that the market is losing downside momentum…as a matter of fact, the leading bullish divergence on the price momentum indicator is indicative of an impending technical rebound – QQQQ is due for a short-covering bounce."
Chart 1.1 – QQQQ Price Momentum (daily).
As expected, QQQQ bounced off key price level at the area of two-year lateral trend-line support, gained about 4% for the day. Any out-of-the-money calls options traded could have earned at least 100% intraday.
Technically speaking, Tuesday trading action is bullish and hence confirmed the validity of the above "technical rebound" hypothesis. Right now, the most obvious level to watch is the $44.50 level. A sustain advance above this level will trigger all sorts of stops, so to speak, and have the power to fuel a run into key resistant at the area of last November low at $48.65.
Early Tuesday morning, the Federal Reserve announced a new Term Securities Lending Facility (TSFL). Basically, this plan stands to improve liquidity by allowing more thinly traded securities to be used as collateral to borrow highly traded Treasury securities.
The news gave a substantial lift to the financial sector with the KBW Bank index rose more than 9% - its largest one day percent gain since 2000.
Chart 1.2 – KBW Bank Index (daily).
Tuesday bullish turn-around had confirmed the "short-term tradable low" scenario that we've offered right here a couple days ago: "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…expect a retest of key price level around the 85 level."
Right now, the most obvious level to watch is, of course, the double resistant at the area of the falling 50-day moving average and the late February bearish breakdown point, about 85. This is a very tough resistant, so expect a renewal of selling interest around this area. Key support is about 75.
The strong surge in buying interest in the financial sector had helped to push the S&P significantly higher. The board market index jumped 46 points or 3.66% to close at 1320.
Chart 1.3 - Standard & Poors 500 Index (daily).
The index printed a massive bullish reversal bar on the daily chart. The short-term relative strength index (RSI) indicator also turned bullish as it crossed above the oversold level. In short, today action is bullish and suggesting another test of key price level around the area the falling 50-day moving average, about 1360. Key support is at January low, about 1270.
Good news surrounding the financial stocks had also helped to put in a bid the blue-chips stocks. The Dow Industrial jumped more than 400 points or 3.55% - its largest one day percent gain since 2003, as a result.
Chart 1.4 – Dow Jones Industrial Average (daily).
The main event today is the bullish breakout above key resistances at the January closing and through the February low. The short-term relative strength index (RSI) indicator also turned bullish as it crossed above the oversold level. In short, today action is bullish and suggesting another test of key price level around the area the falling 50-day moving average, about 12500. Key support is at January low, about 11634.
In summary: while believe that the market had put in an important low, it's still in an early state of healing process. And as a result, we're not expecting any substantial upside rewards, at least for the time being. In addition, there are still too many problems on the charts to believe that it is safe to throw all of our cash into the market. So, it'd be wise to wait for the long-term indicators to move above the "all-clear" zone before making any long-term commitment.
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.
