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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Thursday April 24, 2008.
As expected, stocks closed slightly higher, in a choppy trading session, as investors chew on the better than expected earning report from Boeing Co (BA) and another meltdown in the financial sector. For the day, the Dow Jones industrial average rose 43 points, or 0.3%, to finish at 12763.
Financial stocks were under selling pressure Wednesday largely due to disappointment regarding a massive quarterly loss at Ambac Financial (ABK). The bond insurer plummeted 43% to a new all-time low after the company reported a massive $5.42 per share loss on $1.7 billion in write-downs and a $1.0 billion increase in loan loss provisions. The Street was looking for a much smaller loss of $1.51 per share. And the KBW bank index lost 0.86% as a result.
Chart 1.1 – KBW bank index (daily).
Price continues basing sideway around the area of critical support, about 75. The action is bearish. In addition, the short-term slow stochastic indicator is also trending down, below the signal line, and hence, confirms the strong bearish trend. Right now the most obvious level to watch is the March-April's closing low, about 75. At this moment, it's impossible to know for sure that whether this level holds or not though a sustain decline below it will trigger all sorts of stops, so to speak, hence, has the potential to push prices into the area of 2003 low, about 65.
Chart 1.2 – S&P 500 index (daily).
It seems to us that recent pullback found support at the area of last week's bullish breakout gap (see chart). This is bullish and suggesting a retest of key price resistance around the 1400 level. As mentioned, not only that this is a tough level to overcome, the short-term slow stochastic indicator is suggesting that the market is pretty much overbought. As a matter of fact, the action we've seen recently appears to be very similar to the time between the November's high and April's low when we saw a quite a number of aggressive sell-offs, which took place immediately after the market registered a series of overbought conditions over a short-period of time (see chart). With all that said, it wouldn't surprise us to see the test of 1400, if and when it comes, will be met with eager sellers. The index has an immediate support around the 1350 area.
In summary: the S&P seems poised for a test of an important psychological level, around the 1400 area. However, the wobbly readings from indicators like the short-term slow stochastic suggest that, more likely than not, this test is going to fail.
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.
