Market is fast approaching extreme overbought
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 Friday May 02, 2008.
Stocks started the month on a strong note that saw the Dow closed above 13,000 for the first time in almost 4 months. Tech provided leadership to the market, receiving particular help from large-cap tech stocks. High beta stocks like Google Inc (GOOG), Apple Inc (AAPL), Research in Motion Ltd (RIMM), and Baidu.com (BIDU) are all breaking out. Just so that you know, GOOG has gained more than 34% since profiled in our March 12 “Swing Trader Bulletin” as a potential buy candidate.
We’ve been talking about the “rotation out of commodities and into tech” in the past couple days. It continues today. Just look at what happened to commodities: oil hit $120 earlier in the week, now trades at $112.52 a barrel on the New York Mercantile Exchange, down about 6%. Gold hit $1,000 in March, today closed at $865, down more than 13%. Meanwhile the tech rich index, NASDAQ composite, is trading at its highest level since January.
Chart 1.1 – World gold index (daily).
We’ve said on April 21 that: “Friday’s [April 18th] breaks 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…expects further short-term losses.” As you can see, the yellow metal had lost about 65 points immediately followed our bearish comment.
Recent decline had pushed prices into the area of key support at the 200-day moving average. Not only that this is a strong support, in fact this is the area where bargain hunters often place their bets, the RSI indicator is also indicating an extreme oversold condition – a situation that precursor to a meaningful technical rebound. That being said, recent sell-off seems to be overdone and this will eventually trigger a major buying opportunity.
Nasdaq Composite index posted an impressive gain of 2.81% in Thursday’s trading session. It’s now 14% off the 52-week low, which was hit in March.
Chart 1.2 - NASDAQ composite index (daily).
The index broke out from the six-month falling trend-line resistance today. The action is bullish and helped setting the stage for a test of key resistances around the 2540 level. This, if hurdle and sustain, will turn the major trend up. Although with the RSI indicator hovering around the overbought territory, chances are we’ll see a lot of whipsaw in the days ahead. Immediate support is about 2390.
The most significant part of the day was to see some panic buying in financial stocks as investors bet that the worst of the credit crisis is over. The KBW bank index gained 4.38% as a result. Strength in the financial sector also helped pushing the S&P higher.
Chart 1.3 – S&P 500 index (daily).
The key event here is a breach of key resistance at the area of last November’s low, about 1406. This is bullish and should help getting the next up-leg started. Right now, the most obvious level to watch is the 200-day moving average, about 1450. Not only that this is a tough level to overcome, the RSI indicator is also indicating an overbought condition. So, it wouldn’t surprise us to see some aggressive selling activities in the days ahead. Immediate support is about 1370.
In summary: Thursday’s trading action was extremely strong in most respects. Though with the market’s fast approaching an extreme overbought condition, allow some rooms for whipsaw.
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.
