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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Thursday May 08, 2008.
Stocks stumble out of gate Wednesday with the Dow lost over 200 points. Contributed to the overall weakness was another record high energy prices - crude oil spiked to a record $123 a barrel. This is very bad for stocks because the higher energy prices means higher inflation and as we've already mentioned, the Street was very concern, or nervous, about inflation and the effect it is having on corporate profits and consumer spending. As a matter of fact, Wednesday's trading action had confirmed the validity of the "larger-cycle pullback consolidation" scenario that we've traced out right here in the previous Market Outlook when we wrote that: "while Tuesday's trading action is bullish, the trading volume suggested 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."
Despite the overall weakness, James River Coal Company (JRCC) added on to recent gains, jumped about 8% to $30.88 on heavy volume. This brings the weekly gains to about 7 points or 28%, so far.
Chart 1.1 - James River Coal Company (daily).
Shares of the coal producer gains about 90% since profiled in our March 26 "Swing trader Bulletin" and done so on technical confirmation – volume expands as price climbs. This is the very bullish. Though not only that the stock seems to be overextended at the moment it has also rallied directly into key resistance at the area of 2005 and 2006 lows. So it wouldn't surprise us too see some backings and fillings in the days ahead. On a long-term perspective, however, we're still bullish on JRCC and expecting the stock to trend higher.
Wednesday's sell-off was pretty much board base that saw all ten of the major economic sectors close with losses. And as it was the case since last October, financials got hit hard the KBW bank index dropped 3.54% for the day.
Chart 1.2 - KBW bank index (daily).
The index printed an ugly bearish reversal pattern on the daily chart after a test of key resistance at the area of seven-month falling trend-line was met with an aggressive wave of selling interest. The action is very bearish and suggesting a retest of critical support at the area of March's low, about 75. Right now, follow through is the key. Our instinct tells us that if the bears can successfully take out last Thursday's low, about 82.70, then we could see 75 before you can blink. Immediate resistance is about 90.
As goes the bank so goes the tape. Weakness in the financial stocks – especially in large-cap names like Citigroup (C), JPMorgan Chase (JPM), and Bank of America (BAC) all down about 3% to 5%, weighed on the board market with the S&P lost roughly 26 points or 1.8% to finish at 1392.
Chart 1.3 – S&P 500 index (daily).
Yesterday we said that: "while Tuesday's trading action is bullish, the trading volume 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." The market broke down Wednesday. The action's, in fact, very consistent to the "fake-out" scenario: "a break above key resistance at the area of November's low, about 1406, and back below it" - that we've offered a couple days ago.
The market had a change of character today. Lately, trading volume has been very light as prices climb though today they went in opposite direction. The most significant part of the day was to see that trading volume had finally picked up as prices dropped. And yes, this is the most bearish relationship under the sun. It seems to us that the market is poised for a test of key support at the area of 50-day moving average. As usual, follow through is the key. A sustain decline below last Thursday's low at 1383 will confirm this. Key resistance is at the area of 200-day moving average, about 1435.
In summary: no need to sugar coating, Wednesday's trading action is outright bearish. Although, as noted above, the market can drop all the way to the 50-day moving average and still be in an uptrend. That being said, there is a pretty good chance that the bulls will put up a fight at this important sentiment level. So expect volatility to pickup in the days ahead.
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.
