The rally is now getting heavy
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Good Morning. This is Capital Essence’s “Market Outlook” (the technical analysis of financial markets) for Monday May 19, 2008.
Stocks finished around the unchanged mark Friday. Though do not let the flat tape fool you, Friday trading action was pretty bullish considering that the S&P 500 ending Friday session at a more than 4-month high – the board market index up in four out of five trading sessions last week in a face of a record high energy prices.
U.S. light crude oil rallied $2.19 to close at $126.04 a barrel, after hitting an all-time intraday high of $127.30 earlier.
Chart 1.1 – Light sweet crude oil index (daily).
Technically speaking, today’s bullish breakout above the one-week consolidation pattern had confirmed the validity of the “test of an important sentiment 130 level” hypothesis that we’ve offered right here in the previous Market Outlook when we wrote that: “price is basing sideway near high as it works off the overbought condition. The action is bullish and suggesting that there is a pretty good chance that we’ll see a test of an important sentiment 130 level in the days ahead.” In short, the near term outlook remains bullish barring a close below last week’s low at 122.60. This, if violates, will have the potential to push prices into the area of immediate support at the area of April’s high, about 117; then the February trend-line, now at 115, afterward.
Speaking of energy, James River Coal Company (JRCC) made a very nice move Friday closing up nearly 7% for the session.
Chart 1.2 – James River Coal Company (daily).
Initially profiled in March 26 “Swing Trader Bulletin”, JRCC has gained more than +120% and remains well positioned. From a technical point of view, we really like the trading action in the past couple of weeks – trading volume surge as prices cut through important resistance levels. This has been a great setup for a test of the all-time high set on September 2005 at $52.56. Support is at the area of April’s high, about $26.75.
Despite the better-than-expected earnings results for the most recent quarter from several popular retailers like Nordstrom (JWN), Kohl’s (KSS), and Abercrombie & Fitch (ANF), retail stocks were underselling pressure Friday. The S&P 500 Retail Index ended the session 1.09% lower.
Chart 1.3 – S&P 500 Retail Index (daily).
Price retreated slightly after the test of the ten-month falling trend-line was met with a new wave of selling interest. Not only that this is a tough level to overcome, the short-term RSI indicator also indicating that the sector is pretty much overbought; so it wouldn’t surprise us to see a retest of support at the area of the monthly’s low, about 390. This, if violates, will put an end to the March’s recovery rally and increase an odds for a retest of critical support at the area of March’s low, about 362.
One of the more actively traded shares in the IPO market was Titan Machinery Inc (TITN). Shares of the agricultural and construction equipment retailer jumped almost 11% Friday on explosive volume.
Chart 1.4 – Titan Machinery Inc (daily).
Initially profiled in our May 13 “Swing trader bulletin”, Titan has gained about +17%b and remains well position. Technically speaking, Friday’s bullish breakout had helped setting the stage for a test of April’s high at $24.50. This, if hurdle and sustained, will trigger an acceleration run into the uncharted territory. At this juncture, only a close below May 01st low at $17.59 can wreck the near-term bullish outlook.
US Treasury Secretary Henry Paulson, speaking Friday afternoon, said that “we are closer to the end of the market turmoil than the beginning” regarding to the current financial market turmoil. Still, financial stocks were underselling pressure Friday. The KBW bank index lost 2.26% to finish at 80.73.
Chart 1.5 – KBW bank index (daily).
Prices continue basing sideway near support at the area of the weekly’s low. The medium-term RSI indicator is also fast approaching the oversold level. So it wouldn’t surprise us to see some aggressive buying activities around the area of April’s 24th low at 78.63. Although bear in mind that a failure to hold above this level will trigger a large-scale sell-off that has the potential to push prices back into the area of critical support around the 75 level.
Despite the negative sentiment in the financials stocks and another spike in oil prices that nearly carried crude to nearly $128 a barrel, equities shook off late-day weakness to finish around the flat line. The S&P 500 index up 0.13%.
Chart 1.6 – S&P 500 index (daily).
As expected, the market tried to move higher though still, it’s unable to take out the 200-day moving average. Again, not only that this is a tough level to overcome, the short-term RSI indicator is also indicating that the market is pretty much overbought. So it wouldn’t surprise us to see a retest of immediate support at the area of last week’s low, about 1384, in the days ahead. This, if violates, will increase the odds for a retest of key support at the area of the 50-day moving average, about 1350.
In summary: it seems to us that the eight-week recovery rally is now getting “heavy”. However, unless there is a headline that everyone recognizes as extremely bearish, there is a pretty good chance that this bear-market rally will continue to go on for awhile longer. From a long-term perspective, until we see a positive turnaround in the financial and retail complexes, the bears still have a benefit of the doubts.
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.
