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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Wednesday April 16, 2008.
Stocks ended higher Tuesday, in a choppy session, as investors weighed the strong regional manufacturing report against record oil and gas prices and other signs of inflation. As a matter of fact, Monday's trading action had confirmed the validity of the "rally attempt" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "while expecting volatility to continue for sometime as the market is looking for its footing, we believe there is a pretty good chance for a significant attempt to rally this week."
The most important fact about Monday was that there were no negative earnings surprises. U.S. Bancorp (UBS), Johnson & Johnson JNJ), State Street (STT), Northern Trust (NTRS) all top earnings expectations. This is in contrast to the bad start of this earnings season, with disappointments from General Electric (GE), Alcoa (AA) and Wachovia (WB). Speaking of earning, shares of Intel Corp (INTC) is trading up about 7% in after hour trading after the world's largest maker of semiconductors reported lower earnings that matched analysts' estimates, but gave a higher than expected guidance. And the sector that will benefit the most from INTC upbeat earning would be the semiconductor.
Chart 1.1 – PHLX Semiconductor Sector index (daily).
The sector seems pretty promising at a first glance. Today's bullish candlestick only strengthens the bull case. In addition, the MACD indicator is not only trending above the signal line but also moved above the zero line and hence indicating a bullish trend. So it wouldn't surprise us to see a retest of April high, about 375, in the days ahead. This, if hurdle and sustained, will trigger all sorts of stops, so to speak, and has the power to fuel a run into the December's low, about 400 – that's about 14% from here. Critical support is at the area of March's low, about 332.
Our instinct tells us that optimism surrounding Intel's upbeat earning report is not only helping the tech sector but also the board market.
Chart 1.2 – S&P 500 index (daily).
As you can see, the index hangs on pretty well to key support at April 1st bullish breakaway gap, about 1322. It seems to us that the decline from April 4th high at 1386.74 to Tuesday low at 1324.35 was a retracement in an otherwise bullish pattern that has been forming for the past 3 months. Right now, the most bullish thing the market can do, and we believe it would, is pushing prices above the 50-day moving average, and past the 1390 level. This, if hurdle and sustained, will printed a very handsomely-formed inverted head and shoulders pattern, which has the potential to push the index up to about 1520! That's merely 190 points or 14% from here!
In summary: while the market appears to be hammering out a nice bottoming pattern, we'd exercise with caution until the 50-day moving average is recapture. In short, the near-term outlook is bullish barring a close below key support at S&P 1312.
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.
