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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Wednesday April 02, 2008.
As we've predicted right here in the previous Market Outlook: "the market appears to be setting up for another push higher" stocks recorded a huge gain on the first day of the second quarter with the Dow Jones industrial average rose 391 points or 3.2% - its third best day of the year on a point and percentage basis.
Contributed to the overall optimism were a stronger U.S. dollar, better-than-expected readings on manufacturing and construction, and signs that the hard-hit financial sector is starting to recover.
Before the bell, UBS (UBS) said that it will seek $15.1 billion in new capital. The Swiss bank also warned that it will take a steep first-quarter loss; write down $19 billion related to bad mortgage bets and said that its chairman is stepping down. UBS jumped 14.6%. Deutsche Bank (DB) said it would write down about $4 billion in the quarter, related to bad mortgage bets, sending shares about 3% higher. Lehman Brothers (LEH) said it will raise a higher-than-expected $4 billion in preferred stock, due to stronger-than-expected demand, sending shares almost 18% higher. Good news surrounding the financial stocks had helped to put in a bid in the financial sector that saw the KBW bank index jumped 7.47% for the day.
Chart 1.1 – KBW bank index (daily).
Tuesday's massive rally had set the stage for a test of key resistance at the area of the six-month falling trend-line, now at 90. At this moment, it's unknown whether this level holds or not though a walk above it will break the pattern of lower lows and lower highs that began in October and hence, turning the medium-term trend up. Short-term support is about 78.
Buying enthusiasm compounded with short-covering activity in the financial sector had helped to push the board market higher with the S&P rose 47 points or 3.59% to finish at 1370.
Chart 1.2 – S&P 500 index (daily).
As predicted, Tuesday advance had helped clear resistance at the 1360 level and set the stage for a test of key resistance at the 1400 level. Not only that this is a tough level to overcome, the relative strength index indicator, or RSI, is also fast approaching the overbought level so it wouldn't surprise us to see some sorts of profit taking activity in the upcoming days. Short-term support is at the area of last Friday's low at 1312.
While recent price action is suggesting that the worst of the bear market could be behind us, one of the things the bulls were looking for [in this rally] is rotation back to tech and we saw that today – big time.
Chart 1.3 – PowerShares QQQ Trust, Series 1 (daily).
For starters, the PowerShares QQQ Trust, or QQQQ, is an exchange traded fund that holds all the stocks in the Nasdaq-100 index.
As a matter of fact, Tuesday's trading action was very consistent to the "buy the dip" scenario that we've traced out in the March 27 "Cubes Speculator Bulletin" when we wrote that: "there is a pretty good chance for some sorts of weaknesses into the $43.50, which should be considered as a good buying opportunity…expect a retest of key resistance around the $45 level follows shortly" – QQQQ jumped more than 4% Tuesday and finished slightly above our initial upside target at $45 after the dip into the $43.50 level last week was met with an aggressive wave of buying interest. In fact, any calls options traded could have earned at least 200%.
Tuesday strong advance had brought price directly into the area of the two-month overhead resistance. At this moment, it's unknown whether this level holds or not though what the bulls don't want to see right now is a drop below last week's low at $43.33.
From a medium-term perspective, recent price action has the characteristics of an important intermediate-scale rally that could last for weeks. As noted above, there is a layer of resistance that runs from $45 to $45.90. Keep a close eye on this area for this, if hurdled and sustained, should trigger upside follow-through to $48.65, and then $50 thereafter.
In summary: recent price action suggested that the worst of the bear market could be behind us and the market is launching an important intermediate-scale rally, which could last about 1-3 months. In addition, we're also expected tech stocks to lead the market higher in the days ahead.
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.
