Bearish until proven otherwise

Editor’s note: this column was originally published on Capital Essence’s CEM News on September 5, 2007. 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 Thursday September 06, 2007.

As predicted right here in the previous Market Outlook “stocks look vulnerable for a fresh round of profit taking” equity market finished Wednesday session with widespread lost amid a renewed worry about credit markets.

Financial stocks (BKX, -1.94%) turned for the worse Wednesday after the Wall Street Journal reported that Citigroup (C), which owns about 25% of the market in structured investment vehicles (i.e., SIV), may be vulnerable to further losses.

Apparently, the BKX is heading for a retest of August 16’s low. As mentioned, a failure to hold above this level will open the door for another 10% drop in the financial stocks. And as we’ve opined on July 18 – “financial stocks [had entered] a secular bear market.”

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

The Standard & Poors 500 Index (daily) chart above addresses a short-term time frame. As expected, the board market index resumes the July-August downleg after an attempt to test resistant at the 1500 level was met with an even more aggressive wave of selling pressure. The index has a layer of support that runs from 1430 to 1370. Short-term resistant is about 1500.

(Click on image to enlarge)

The Dow Jones Industrials Average (daily) chart above addresses a short-term time frame. Similar to the S&P 500 Index, the blue-chips index had also resumed the July-August downleg after an attempt to test resistant at the 50-day moving average was met with an even more aggressive wave of selling pressure. Short-term support is at the 200-day moving average, about 12900. The index has a layer of resistant that runs from 13500 to 13700.

Bottom line: as we’ve noted right here a couple days ago, there is there is a lot going on in this market (e.g., credit crunch, energy crisis…etc) and we, therefore, would remain skeptical [read: bearish] as long as prices trade below key resistant at August 8’s high.

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.