Editor's note: this column was originally published on Capital Essence's CEM News on March 17, 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 18, 2008.
It was a remarkable day on Wall Street Monday for what started to be another nervous breakdown in stocks, ended in a much better fashion than the majority of market participants had expected. Stocks cut losses and the Dow managed to end higher Monday, the blue-chips index lost as much as 193 points at its low of the day, gained about 21 points to 11972.
Contributed to the overall weaknesses was the news that JP Morgan Chase (JPM) agreed to buy Stearns (BSC) for just $2 a share, or $236 million. That's significantly below Bear Stearns's book value of $84 per share at the end of the fourth quarter.
Nervousness overall Bear Stearns's fire sale had not only triggered a systematic "unwinding" in the financial services but also in the commodities industry as well.
Chart 1.1 – Commodity index (daily).
The commodity index which is composed of corn, wheat, soybeans, sugar, oil, gold…etc broke down decisively Monday. Technically speaking, today breakdown had completed the bearish double top pattern. For starters, double top, or "M" pattern, occurs when the market makes two significant and similar tops within a short period of time surrounding a small decline. When the trough of that decline — support — is broken, the pattern is complete and further weaknesses can be expected.
While the medium-term outlook is bearish, Monday sell-off appeared to be overdone. Expect some sorts of consolidation around the 400 level follow by another naughty sell-off that has the potential to push prices into the area of key support at previous bullish breakout point, about 370.
Although, given how much angst there was over the Bear Stearns's fallout, the bulls have to be happy with how little damage was done to the major indices today.
Chart 1.2 – S&P 500 index (daily).
Despite the overall weakness, the index managed to close above key support at the area of January low at 1270. As this moment, we still don't have enough evidence to know for sure whether this level holds or not; though, it worth noticing that the bullish divergence on the On Balance Volume, or OBV, indicator is diminishing after the massive "unwinding" in the past couple of days. The action had increased the risk for a downside breakdown. Keep a close eye on key support at the 1270 for a sustain decline below this level will trigger all sorts of stops, so to speak, and has the potential to push prices into the area of 2006 low, about 1220. Short-term resistant is about 1320.
In summary: despite the intense selling pressure, the S&P is hanging stubbornly above the critical 1270 level. The action is indicative that the market is still in a process of finding the bottom. As like we've said the previous Market Outlook, this is going to be a week to remember. And hopefully market reaction to the FOMC announcement on Tuesday at 2:15 ET will do the trick.
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.
