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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Wednesday May 07, 2008.
As expected, stocks opened on a negative tone Tuesday that saw the Dow lost more than 100 points in early trading. Contributed to the early weaknesses were another record high energy prices - crude oil spiked to a record $122.35 a barrel - and Fannie Mae's (FNM) big quarterly loss, still the stock rallied 8.91%. Speaking of energy, shares of James River Coal Company (JRCC) – a subject of our previous bullish discussion - jumped more than 10% in a face of yesterday's 8% gains to $28.68, a new multi-year high. Just so that you know, shares of the coal producer gains more than 73% since featured in our March 26 "Swing trader Bulletin". Apparently, coal stocks are doing pretty well lately. Shares of Fording Canadian Coal (FDG) also jumped 4.43% today or about 10% after profiled in our "Swing trader Bulletin" 2 days ago.
Market, however, stabilized by midday and moved higher as traders are betting that the U.S. economy will improve in the second half. This is, of course, a very bold guess though today trading is indicative that this group of traders is willing to put the money where their mouth is. And this is very positive.
Chart 1.1 – CBOE Volatility Index (daily).
General speaking, VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets. Now with the VIX, or a fear indicator, is sitting at its lowest levels since October, it seems to us that traders are getting more comfortable with taking on more risks. And this, from a contrarian point of view, is bearish for the board market.
Buying interest in the energy and financial sectors provided the market a strong lift, the S&P rebounding from a 0.7% loss to finish the day with a 0.7% gain.
Chart 1.2 – S&P 500 index (daily).
The index rose above last week's closing high after a test of support at the area of 10-day moving average was met with an aggressive wave of buying interest. This is bullish and helped setting the stage for an important test of key resistance at the area of 200-day moving average. Trading volume, however, remains disappointed. It has been light since we broke out in April. This is not very encouraging and suggesting that the rally might not sustain. Immediate support is at the area of last Thursday's low, about 1383. This, if violates, will trigger a large scale sell-off that has the potential to push prices into the 1350-1325 area. Key resistance is at the area of 200-day moving average, about 1435.
In summary: this is a very interesting and important day. There were a lot of reasons to sell, however, the market pulled off a rally. This action is bullish. However, until we see a pickup in trading volume, it's believed that the rally will not sustain. In addition, with the VIX hovering at the low-end of its six-month trading range, the odds for a larger-cycle pullback consolidation had also increased.
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.
