Bullish bias going into March quadruple witching expiration

Editor’s note: this column was originally published on Capital Essence’s CEM News on March 18, 2008. 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 Wednesday March 19, 2008.

Stocks jumped Tuesday, with the Dow soared 420 points, its fourth-biggest one-day point gain ever, amid positive earning reports from Lehman Brothers Holdings Inc (LEH) and Goldman Sachs Group Inc (GS). Aside from these upbeat earning reports, the FOMC decision was also helped move stocks to the highs of the day. The Federal Reserve cut the fed funds rate by 75 basis points, to 2.25%. As a matter of fact, Tuesday’s trading action had confirmed the validity of the “Looking for a Bottom” scenario that we’ve traced out right here in the previous Market Outlook when we wrote that: “despite the intense selling pressure, the S&P is hanging stubbornly above the critical 1270 level. The action is indicative that the market is still in a process of finding the bottom.”

Overall it was a very interesting trading session. And unsurprisingly, all stocks in the “Swing Trader Bulletin” portfolio simply EXPLODED Tuesday led by Amazon.com Inc (AMZN). Shares of the online retailer rose 7.77% - the position is holding an unrealized gain about 11% since profiled on March 10. Ariba Inc (ARBA) rose 5.21%, Google Inc (GOOG) jumped 4.59%, Lifecell Corp (LIFC) gained 4.55%, Agilent Technology Inc (A) up 2.70%, Cal-Maine Foods Inc (CALM) gained 2.74% - the position is holding an amazing gain of more than 53% and trading at an all time high. The newly profiled Merck & Co (MRK) also jumped 3.20% on its debuts today!

Positive responses to Lehman and Goldman Sachs earning reports sparked a massive rally in the financial sector with the KBW Bank index gained 7.24% on the day.

Chart 1.1 – KBW Bank index (daily).

Price had rally directly into key resistance at the area of 20-day moving average. At this moment, it’s unknown whether this level can be taken out or not though the leading bullish divergence on the On Balance Volume, or OBV, indicator at recent low suggested that there is a pretty good chance that we’ll see a push upward into the area of key resistance, about 87. Key support is about 75.

Optimism surrounding financial stocks had helped to push the market significantly higher with the boarder market, S&P, index rose 4.24% to finish at 1330.

Chart 1.2 – S&P 500 index (daily).

Thanks to Tuesday massive rally, it looks like the bullish double bottom pattern now has a chance. The main event here is the push above last Friday’s bearish reversal point, about 1320, and through the 20-day moving average. What we want to see next is a sustain advance above the overhead resistance at the area of February high, about 1400. In addition, the leading bullish divergence on the On Balance Volume, or OBV, indicator at recent low couple with today’s bullish crossed above the 20-day moving average also seem favorable a break to the upside. Key support is at the area of January low, about 1270.

In summary: technically speaking, Tuesday’s explosive upside move had helped reversing the pace of price action, from negative to positive. This is bullish and suggesting further strength going into Thursday quadruple witching expiration.

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.