Upside momentum could start to fizzle out soon
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 April 21, 2008.
Equity market soared Friday, with the Dow rose about 228 points or 1.8%, as investors cheered better than expected earnings from Google Inc (GOOG) and Citigroup (C). As a matter of fact, Friday’s trading action was very consistent to the “bullish” prediction that we’ve offered in the previous Market Outlook when we wrote that: “unless there is a headline that everyone recognizes as bearish, Friday will be a strong up day for the bulls.”
Speaking of earning, shares of Amdocs Ltd (DOX) jumped 14.58% Friday on three times daily average volume after the operation software provider reported a better-than-expected result for its fiscal Q2 ended March 31.
Chart 1.1 – Amdocs Ltd (daily).
As you can see, DOX is doing extremely well since profiled in our April 1 “Swing Trader Bulletin” as a potential buy candidate. Friday’s massive breakout is bullish though it had also pushed prices into the area of major resistance at the 200-day moving average. Although admittedly overextended at current level, expect the shares to draw in buyers on a pullback to immediate support at the area of March’s high, about $30.
Needless to repeat, Friday was a very strong day for the bulls except the bullion. It worth noticing that, gold stumbled out of gate Friday amid a strong greenback. COMEX gold for June delivery fell $27.70 to settle at $915.20 an ounce.
Chart 1.2 – World gold index (daily).
Friday’s break to the downside had completed the bearish lower-high pattern. In addition, the on balance volume indicator, or OBV, also traded below its 20-period moving average, and hence confirmed the bearish trend.
While seemingly vulnerable for further losses, we see no convincing evidence that the long-term bull market in commodity is over. With that said, until proven otherwise, we’re assuming that this is a bull market correction, embodying excellent trading opportunities. And the question is “what’s likely downside target from which the long-term trend can resume?” Well, as mentioned, an easy and quite efficient method is to take advantage of the tendency for price to rebound after it had retraced, or pull back, to key moving average. Right now, the most obvious level to watch is the 200-day moving average, about 800 now. This is good place where bargain hunters often place their bets. However, if the buyers do not step in then we’ll know that the long-term bull market in commodity might be…over.
As noted above, contributed to the overall optimism was an upbeat earning from Google Inc. As predicted, Google was one of the most influential stocks on Friday trading session. Shares rose about 20%. Google’s strong performance helped to put in a bid in the tech sector.
Chart 1.3 – NASDAQ Composite index (daily).
As expected, the tech rich index posted a hefty gain of 2.61% Friday. While the action is bullish, price had rallied directly into the area of overhead resistance that runs from 2419 (February 01st high) to 2450 (six-month falling trend-line) – see chart. Not only that this is a tough level to overcome, the short-term relative strength index indicator, or RSI, is also indicating an overbought condition. So it wouldn’t surprise us to see some sorts of consolidation in the days ahead. Immediate support is about 2350.
Also setting the positive tone to Friday’s trading was the “not-so-awful” earning report from Citigroup. Shares of the investment banker jumped more than 4% after the company announced Friday morning a $5 billion loss, or $1.02 per share, for its most recent quarter, amid $12 billion in write-downs and asset adjustments. While the quarter’s loss was worse than Wall Street expected, it wasn’t as bad as anticipated and hence reassured investors that the worst is over. Optimism surrounding Citigroup had helped to push the board market higher with the S&P 500 index gained 1.8% for the day.
Chart 1.3 – S&P 500 index (daily).
Similar to the NASDAQ, Friday’s massive rally had pushed the S&P directly into the area of overhead resistance (see chart). Not only that this is a tough level to overcome, the short-term relative strength index indicator, or RSI, is also indicating an overbought condition. So it wouldn’t surprise us to see a correction, which could be either in price (i.e., lower prices) or in time (i.e., basing sideway), in the days ahead. Immediate support is about 1365.
In summary: with a majority of short-term indicators suggesting an overbought condition as prices challenging key overhead resistance, we expect the upside momentum will soon start to fizzle out. Though do not confuse this with a bearish reversal, small price correction or retracement after a strong advance is not only necessary but also healthy.
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.
