Waiting for the market to show its true hand

Editor’s note: this column was originally published on Capital Essence’s CEM News on September 1, 2007 at 10:38 pm ET. 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 Tuesday September 04, 2007.

We’ve opined right here in the previous Market Outlook that “the current market slide is a change in leadership rather than the beginning of the bear market…smart money might have been rotating out of the financial stocks and migrating into energy… from a long-term perspective, we believe that energy will continue to be a relative secular winner” – see “A change in leadership” August 27, 2007. Energy stocks continue to buck the trend and finished higher for the week, up 2.33%.

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As predicted, the PHLX Oil Service Sector Index is sailing smoothly toward July’s high. A sustain breakout above this level will propel prices into the 300 level. That’s about 10% from where we sit.

Let’s take a look at the major index charts:

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The Standard & Poors 500 Index (weekly) chart above addresses an intermediate-term time frame. The board market index appears to be stabilized around the area of the moving average support. As mentioned, the bulls shall prevail as long as the index holds above key support at the long continuous trend-line going back to early 2003. Intermediate-term support is at August 16’s low, about 1370. Short-term resistant is at August 08’s high, about 1504. A sustain breakout above this level will propel prices into the area of key overhead resistant at July’s high, about 1555.

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The Dow Jones Industrials Average (weekly) chart above addresses an intermediate-term time frame. Similar to the S&P 500 Index, the blue-chips index had also found support at the area of the 40-week moving average. As mentioned, the bulls should be able sleep tight as long as the index holds above key support at August 16’s low, about 12500. Short-term resistant is at August 08’s high, about 13700. A sustain breakout above this level will propel prices into the area of key overhead resistant at July’s high, about 14K.

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The NASDAQ Composite Index (weekly) chart above addresses an intermediate-term time frame. Similar to its peers, the tech rich index also seems to be stabilized around the area of the moving average support. Tech stocks shouldn’t get into any serious trouble as long as the index holds above key support at August 16’s low, about 2386. Short-term resistant is at August 08’s high, about 2627. A sustain breakout above this level will propel prices into the area of key overhead resistant at July’s high, about 2700.

In speaking of tech, The NASDAQ 100 ETF (QQQQ) rose about 3% almost immediately followed our bullish comment – “breadth indicator had crossed to neutral from oversold today. Technically speaking, this signals internal strength, which often precedes a bull leg (similar to those of the summer ’06 and spring ’07)” – “Cubes Speculator Bulletin” August 22, 2007.

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Further, we’ve also noted on August 29 evening that – “new Buy signal… [Expect] a test of $49” –QQQQ broke out above the short-term key resistant at the area of moving average and tested the $49 level last Friday. The Portfolio had locked in an amazing triple digit gain last week.

Bottom line: there is a lot going on in this market and we, therefore, would remain skeptical while waiting for the market to show its true hand. With that said, an intermediate-term bullish move should occur if the bulls manage to push prices to above key resistant at August 8’s high. And a failure to do so will increase the risk for a retest of Augusts’ low.

Until next time, good luck.