Editor's note: this column was originally published on Capital Essence's CEM News on March 23, 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 24, 2008.
Stocks swing wildly last week with the Dow gained more than 400 points on Tuesday, down 300 on Wednesday, and then getting back nearly 300 on the last day of the holiday shorten week. Financials led the way higher, thanks to a pair of upgrades and news that the Fed is expanding its previously announced plan to increase liquidity. The KBW Bank index rose 7.41% Thursday to close at 85.85.
Chart 1.1 – KBW Bank index (daily).
The main even here is the cross above the key price level at the area of the 50-day moving average. This is bullish and had, in fact, confirmed the validity of the "bullish bias" scenario that we've traced out right here a couple days ago when we wrote that: "there is a pretty good chance that we'll see a push upward into the area of key resistance, about 87."
What we want to see now is an upside follow-through to last week's bullish breakout. And the most obvious level to watch is the 90 level. A successful push above this level will raise the odds that a sustainable double bottom is in place. Key support is at the area of March low, about 73. At this juncture, only a sustain decline below this level can wreck the bullish outlook.
It worth notice that oil prices, which hit record highs last week, had slipped for two straight days along with other dollar-traded commodities in response to the stronger U.S. currency.
Chart 1.2 – Light sweet crude oil index (daily).
Last week's decline had pushed prices back directly into the area of key support at the previous bullish breakout point. Not only that this is a strong support, the short-term relative strength index (RSI) indicator had also reach the oversold level and we, therefore, wouldn't be surprise to see a rebound into the 104-106 area. Key support is at last Thursday's low, about 98.90.
Despite the massive sell-off in the commodity sector, optimism surrounding the financial stocks had helped to push the board market higher with the S&P 500 index rose 2.39% to finish at 1329.
Chart 1.3 – S&P 500 index (daily).
Last Thursday's bullish trading action was very important because not only it's indicative that the double bottom still in place, there's now a higher low to go along with it. However, the fact the index still trades below the widely followed 50-day moving average as resistant seems favorable the bearish case. This doesn't mean that this level can't be taken out, but until we see a sustain advance above it, the basic definition of a declining trend remains in force.
While the short-term outlook remains dull, the bullish divergence on the on balance volume, or OBV, indicator couple with the surging negative investor's sentiment - according to Investor's Intelligence, the bearishness of newsletter writers had reached the eye popping level of 44.7% - signal that an important bottom could be in the making. The index has a layer of resistance that runs from 1350 to 1400.
In summary: while history hardly repeats itself, it's possible to see further short-term gains after last week's explosive upside move. However, until the S&P cross above the 1400 level, the bulls don't really have any cases.
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.
