Editor's note: this column was originally published on Capital Essence's CEM News. 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 Wednesday April 23, 2008.
Stocks stumble out of gate Tuesday with the Dow Jones industrial average lost around 105 points, or 0.82% to finish at 12720. As a matter of fact, Tuesday's trading action had confirmed the validity of the "pullback consolidation" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "it seems to us that Monday's decline is just a beginning of a modest pullback, which could lasts about 2 to 7 trading sessions."
Contributed to the overall weakness was a record high energy prices – U.S. light crude oil for May delivery hit an all-time trading high of $119.90 a barrel before pulled back a bit and settle at $119.37, up $1.89, on the New York Mercantile Exchange. The gains in crude oil prices dragged on the airlines stocks. The Amex Airline Index dropped 12.3% as a result.
Chart 1.1 – Amex Airline Index (daily).
Tuesday's decline had pushed the airline into the level that had not seen since 2002 – the last bear market bottom. While the action is bearish, the RSI's positive divergence is indicating that the sector is at or pretty close to a tradable bottom. However, until key resistance at the area of March's high, about 28, is taken out and held on a retest, we wouldn't touch the sector.
Tech stocks were also under pressure Tuesday amid a dour profit outlook from Texas Instruments Inc (TXN). The chip maker reported higher quarterly earnings that met estimates though its forecast for current-quarter profit fell short of estimates. Shares dropped almost 6%. And the Nasdaq Composite Index lost 1.29% for the day.
Chart 1.2 – Nasdaq Composite Index (daily).
The index pulled back to the area of immediate support after a test of key resistance around the 2400 level was met with an aggressive wave of selling interest (see chart). Volume also expanded as prices dropped. This is bearish. Right now the most obvious level to watch is last Friday's bullish breakout gap, about 2350. This is a very important sentiment level that needs to be held to confirm last week's rally. With that said, a failure to hold above this level will increase the odds for a larger-cycle pullback, which has the potential to push prices into the area of April low, about 2260. The index has a layer of resistance that runs from 2410 to 2480.
As noted above, oil was a major drag on the markets - the boarder market index, S&P 500, lost as much as 19 points or about 1.4% as crude oil spiked just shy of $120 mid-morning. The selling pressure was, however, eased a bit into the close as traders position themselves ahead of tomorrow's oil inventory and Apple Inc (AAPL) earning reports. For the day, the S&P lost about 12 points or 0.88%.
Chart 1.3 – S&P 500 index (daily).
The index dropped away form the psychological important 1400 level. The slow stochastic indicator also crossed below its signal line today and hence confirmed the bearish trend. Right now the most obvious level to watch is last week's bullish breakout gap, about 1360. Staying above this level is critical.
In summary: although seemingly vulnerable for further short-term loss, the bulls still have the benefits of the doubts as long as prices hold above S&P 1360.
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.
