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Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Wednesday May 21, 2008.
Stocks stumble out of gate Tuesday with the Dow losing nearly 200 points. As a matter of fact, today trading action is very consistent to the bearish "turnaround Tuesday" scenario that we've offered right here in the previous Market Outlook.
Contributed to the overall weaknesses were another record high energy prices, bearish news on financial stocks and a higher than expected core inflation reading.
U.S. light crude oil rose $2.26 to settle at a record $128.98 after hitting a new intra-day trading record of $129.10 a barrel earlier in the session.
Chart 1.1 – Light sweet crude oil index (daily).
In fact, today's trading action had confirmed the validity of the "test of an important sentiment 130 level" hypothesis that we've offered a couple days ago when we wrote that: "prices' basing sideway near high as the market works off the overbought condition. The action is bullish and suggesting that there is a pretty good chance that we'll see a test of an important sentiment 130 level in the days ahead."
Crude's jump pushed the Dow Jones transport, which posted an all time high Monday, lower – down 0.79%. Though it worth notice that, shares of Pacer International Inc (PACR) bucks the overall trend, up 1% for the day. The gain, while small, is pretty bullish given the overall pessimism surrounding transport stocks. It's indicating that there is a pretty good dose of optimism in the stock.
Chart 1.2 – Pacer International Inc (daily).
Initially profiled in May 01 "Swing trader bulletin", shares of the air delivery & freight services provider has appreciated more than 7% and remains well position. From a technical point of view, we really like the trading action in the past couple of days – price climbs steadily above the one-month congestion area after a pullback to support at the area of January trend-line was met with a new wave of buying enthusiasm. In addition, recent MACD indicator bullish crossover also strengthens the bull case – the MACD had not only crossed above its signal line but also trending above the zero line and hence, confirmed the bullish trend. The best case scenario would be an upward push to the area of last August' high, about 22. This, if hurdle and sustain, will increase the probability for a test of the long-term overhead supply at the area of last February's bearish breakdown gap, about 30.
Financial stocks were underselling pressure Tuesday after the highly influential Oppenheimer's Meredith Whitney opined that the credit crisis will extend into 2009. The KBW bank index dropped 2.33% as a result.
Chart 1.3 – KBW bank index (daily).
It seems to us that the sector is heading back to the critical support around the 75 area. Also, the bearish MACD crossover appeared to favor the bear case. Right now the most obvious level to watch is, of course, the 75 level. This, if violates, will trigger all sorts of stops, hence, has the potential to push prices into the area of 2003 low, about 65. The breakdown, if and when it comes, shall take the board market down with it. Key resistance is at the area of May high, about 89.
Bad news surrounding financial stocks dragged down the S&P 500 – after all, it comprises 16.5% of the board market index.
Chart 1.4 – S&P 500 index (daily).
The index printed an evening star pattern at the area of key resistance (see chart). This is very bearish and indicating a change in the direction of the trend. Right now, we'll be watching the May 09th low at 1384. As mentioned, a walk below this level will push prices directly into the 50-day moving average. And this, if violates, will put an end to the eight-week recovery rally.
In summary: there is no need to sugar coating it Tuesday's trading action is outright bearish and suggesting further prices weaknesses in the next two to five trading sessions.
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.
