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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Monday May 05, 2008.
Stocks opened on a positive note Friday, looking to extend the prior session's gains, though the rally eventually frizzle out amid a higher commodities prices. Still, stocks closed the session with a modest gain with the Dow Jones industrial up 48 points or 0.37% to 13058 – its highest close this year.
U.S. light crude oil for June delivery rose $3.80 to settle at $116.32 a barrel on the New York Mercantile Exchange. And COMEX gold for June delivery rose $7.10 to $858 an ounce. As a matter of fact, Friday's trading action had confirmed the validity of the "commodities rebound" scenario that we've offered in the previous Market Outlook when we wrote that: "recent decline had pushed gold prices into the area of key support at the 200-day moving average. Not only that this is a strong support, in fact this is the area where bargain hunters often place their bets, the RSI indicator is also indicating an extreme oversold condition – a situation that precursor to a meaningful technical rebound. That being said, recent sell-off seems to be overdone and this will eventually trigger a major buying opportunity."
Chart 1.1 – World gold index (daily).
As predicted, the yellow metal rebound nicely after a test of an important sentiment level around the $850 was met with a new wave of buying interest. Right now upside follow-through is the key. Keep an eye on the 878 level. This, if hurdle and sustain, will trigger an acceleration run into the $950-$1000 area. Although as always, we must stress that recent decline in gold was anything but panicked. That being said, it's possible that we'll see a nasty weak bull shake out prior to a strong thrust upward. Critical support is at the area of last December's bullish breakout point, about $800.
Chart 1.2 – Light sweet crude oil index (daily).
Similar to gold, oil also moved higher today, up more than 3% after a test of support at the area of three-month rising trend-line was met with an aggressive wave of buying interest. In addition, the RSI indicator had also worked off the overbought condition. Technically speaking, the medium-term technical outlook is bullish barring a close below last Thursday's low at 110.50. Immediate resistance is at last Monday's high, about 120.
With oil hanging around record high level, the fear that there is nothing to moderate the rise in inflation rippled through stocks – the Nasdaq composite index gave up all of the early gain and closed slightly lower.
Chart 1.3 - NASDAQ composite index (daily).
We've noted in the previous Market Outlook that: "while Thursday's trading action is bullish, the RSI indicator is indicating an overbought condition, so chances are we'll see a lot of whipsaw in the days ahead." The index printed a bearish reversal bar today after an early rally into the area of 200-day moving average was met with an aggressive wave of selling interest. Volume had also expanded as price dropped. This is not very encouraging though it was expected. Right now the most obvious level to watch is Thursday's low at 2416. A sustain decline below this level will increase the probability for a test of immediate support at the area of previous bullish breakout point, about 2390. Critical support is at the area of 50-day moving average, now at 2320.
Financial stocks were under pressure Friday after Standard &Poor's downgraded Countrywide Financial's (CFC) debt to junk. The downgrade is a wakeup call to those who bet that the worst of the credit crisis is over. Weakness in the financial sector dragged down the board market. The S&P 500 index gave back a majority of its early gains to close up just 4 points or 0.32%.
Chart 1.4 – S&P 500 index (daily).
We've said on May 01 that: "the main event here is a breach of key resistance at the area of last November's low. This is bullish and should help getting the next up-leg started." The index added on to previous gain. However, it ran into resistance at 1425 – it's about 10 points below the 200-day moving average. As mentioned, not only that this is a tough level to overcome, the RSI indicator is also indicating an overbought condition. So it wouldn't surprise us to see some whipsaws in the days a head. In short, the overall technical outlook remains positive barring a close below last Thursday's low at 1383. Key resistance is at the area of 200-day moving average, about 1435.
In summary: technically speaking, the market is pretty much overbought in a medium-term basis - a situation that often precedes a pullback consolidation. However, we do not think the rally is over. Rather, it's going to be a stair-step advance as market breaks through pieces of key resistances. That being said, while recent trading action was very bullish in most respect, the market needs a good pause before explode higher.
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.
