Turnaround Tuesday
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Good Morning. This is Capital Essence’s “Market Outlook” (the technical analysis of financial markets) for Tuesday May 20, 2008.
We’ve noted right here in the previous Market Outlook that: “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.” Stocks opened on a positive note Monday with the S&P 500 hit a five-month high amid a stronger-than-expected economic indicators report. The market, however, struggled in the afternoon on record commodity prices.
With regard to commodities, U.S. light crude oil for June delivery rose 76 cents to settle at a record $127.05 a barrel on the New York Mercantile Exchange after hitting an all-time trading high of $127.82 a barrel Friday. Gold added $3.50 or 0.39% to settle at $904.80.
Chart 1.1 – World gold index (daily).
The yellow metal rallied directly into the area of 50-day moving average after the test of support at the area of 200-day moving average was met with an aggressive wave of buying interest. As a matter of fact, recent trading action was pretty consistent to the “technical rebound” scenario that we’ve offered right here a couple week ago when we wrote that: “price pullback to key support at the area of 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.” As you can see, the yellow metal has gained about 50 points immediately followed our positive comment.
However, with the short-term RSI indicator is fast approaching the overbought level as prices rallied directly into the area of 50-day moving average, it seems to us that the stage had been set for a pullback consolidation. That being said, while we’ve became aggressively bullish at the downside re-test of 200-day moving average in early May, believing that the test would be successful, we’ve, regrettably, turned cautious now.
Speaking of gold, shares of Yamana Gold Inc (AUY) added on to last week’s strong gain, up 1.26% for the day. Initially profiled in May 02 “Swing Trader Bulletin“, AUY gains more than +17% and remains well position.
Chart 1.2 – Yamana Gold Inc (daily).
From a technical point of view, we really like the trading action in the past couple of days - a modest pullback to minor support around the $14 level followed by an upside thrust directly into the area of key resistance. Right now, the most obvious level to watch is today’s high at $15.49. This, if hurdle and sustained, will complete the bullish inverse Head-Shoulder pattern, hence, has the potential to fuel an acceleration run toward March’s high, about $20. In short, the near-term outlook remains bullish barring a close below last week’s low at $13.80.
Negative headlines surrounding financial stocks - Goldman Sachs (GS), Morgan Stanley (MS) and Lehman Brothers (LEH) all lost about 2% after having their second quarter earnings estimates cut at Citigroup (C) – dragged down the board market. The S&P 500 index, which rose as much as 1% in early Monday session, ended the day near the zero line.
Chart 1.3 – S&P 500 index (daily).
Last week we’ve said that: “while Thursday’s trading action is bullish and indicating that the market is ready for an upward push above the 200-day moving average, trading volume didn’t seem supporting the underlying advance. This is a bearish relationship and suggesting that the rally might not sustain.” As we saw, they did exactly that – almost immediately followed the early panic buying that took the S&P above the 200-day moving average, the bears stepped in and pushed the index back under the 200-day MA (see chart). The index printed an ugly bearish shooting star candlestick on the daily chart as a result. In addition, the short-term RSI indicator is also indicating an extreme overbought condition. Right now, follow-through is the key. We’ll be watching the 1420 level. This, if violate, will trigger a large-scale sell-off that has the potential to push prices directly into the area of May 09th low at 1384, then the 50-day moving average afterward. At this juncture, only sustain advance above today high at 1440.24 can wreck the short-term bearish outlook.
In summary: it seems to us that Monday’s bearish trading action had helped setting the stage for a turnaround Tuesday. However, unless the bears manage to push prices below S&P 1384, the upcoming correction is merely a consolidation that would eventually trigger a major buying opportunity.
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.
