Bear market rally
Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.
Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 01, 2008.
Equity market finished higher Friday with the Dow Jones industrial average gained 1.2%. The session’s advance helped contribute to a 9.7% gain for the week. Market breadth was strong. Winners beat losers two to one on the NYSE. And thus we can said although trading volume was light, thanks partly to the shortened session, Friday’s advance is something more than a short covering effort ahead of the weekend.
There was, however, one red flag in last week’s massive advance - the tech sector continues to lag. The NASDAQ Composite index added just 3 points or 0.2% as the Dow up 102 points. This is bearish and suggesting that unless tech stocks get their acts together and lead next week, the rally that started from November 21 low is merely another bear market rally, and stocks will move down soon.
Speaking of tech, shares of GrafTech International Ltd. (GTI) outperformed on a relative basis, up 2.1%. It was one of the best gainers last week – up about 50%. Just so that you know, initially profiled in our November 21 “Swing Trader Bulletin” as a potential buy candidate, GTI had gained about 50% and remained well position.
Chart 1.1 - GrafTech International Ltd (daily).
As you can see, last week’s strong rally was rooted from the amazingly strong positive divergence along with the extremely oversold condition. The overall pattern looks good for more upside over the short to medium term. So we should expect a test of the 8.30 level soon. A move above 6.97 will confirm this. At this juncture, only a decline below 4.19 will begin to compromise the near-term bullish outlook.
Notably, financial stocks caught a bid in shortened holiday session with the KBW Bank index, or BKX, added 3.2%.
Chart 1.2 - KBW Bank index (daily).
Looking at the five-month daily chart of the BKX, we can see that the sector had rallied directly into key overhead resistance at the area of July and October lows. Not only that this is a tough level to overcome, our proprietary overbought/oversold indicator is also indicating an overbought condition. So it wouldn’t surprise us to see some sorts of pullback consolidations in the days ahead. In short, there are some red flags but unless there is a close below 32.96, the bears will not have any cases.
Admittedly, last week’s massive rally looked and felt very good. It, however, might still be a bear market rally unless it overshoots above key resistance around S&P 1005.
Chart 1.3 – S&P 500 index (daily).
Last week’s massive rally pushed prices directly into the 2-conjoining resistance – the September trend-line and the 20-day moving average. Not only that, Friday’s narrow range bar and the stochastic overbought condition had also raised the odds for a trend reversal. In short, the current situation is very similar to what we saw at the end of October. At that time, the S&P failed to follow-through and the market collapsed.
However it doesn’t mean that history has to repeat itself. The market might just ignore the red flags and move higher. Although, in order for the bear market rally to turn into something more, we need to see a sustain advance above the November high, about 1005. This, if and when it happens, would break the “lower high, lower low” pattern going back to December 2007 and thus give us an intermediate-term buy signal.
In summary: so far the up-leg that started from November 21 low at S&P 741 has proved nothing as far as its staying power or as a possible bottom for the bear market. That’s being said, until proven otherwise, the current advance is a short-term bear market rally, which should be over sooner rather than later. Although, we would reclassify it as something stronger if we see a more constructive pattern on the S&P chart.
Until next time, good luck.
(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.
