S&P set up for an upward thrust
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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday August 27, 2008.
Stocks opened in a positive tone Tuesday, but the market quickly gave up all of the early gains and traded below the zero line for most of the session. Although the bulls managed to push prices slightly above the zero just minutes before the closing bell. For the day, the Dow Jones industrial average gained 26 points or 0.2% to finish at 11412. As a matter of fact, Tuesday trading action had confirmed the validity of the “range bounce” scenario that we’ve traced out in the previous Market Outlook when we wrote that: “despite Monday’s massive sell-off, the S&P 500 index stills stuck in a range… we could be range bounce… into September.”
Continued to the early weakness was a jump in energy prices. Crude futures for October delivery gained $1.16 to settle at $116.27 a barrel in early trading on growing fears that Hurricane Gustav will interrupt oil supplies from the Gulf of Mexico.
Chart 1.1 – United States Oil Fund LP (daily).
Looking at the seven-month daily chart of the United States Oil Fund LP (USO) – an ETF that tracks crude prices – we can see the stock rebound nicely after a test of support around the 90 area was met with a new wave of buying interest.
Current price structure suggests strongly that a significant low has been established and the stock is in an early stage of a new up-leg that points to a test of the 98 level, then all the way to 104. At this juncture, only a sustain decline below August low at 89.83 can wreck the near-term bullish set-up.
As usual, higher energy prices dragged the market lower. Fortunately, strength in the financials gave stocks a boost.
According to the FDIC, the number of problem institution assets increased to $78 billion from $26 billion. This headline is not as bad as it seems, considering $32 billion of the asset increase was due to Indymac (which has already failed) and the 98% of institution remain well capitalized. As a result, the financials sector gained 0.7%.
Tuesday’s late day rebound had helped keeping the S&P well above the 1260 level.
Chart 1.2 – Standard & Poor’s 500 index (daily).
As you can see, the index continues basing sideway near support. Right now, from a strict near-term technical perspective, we suspect that the S&P 500 index could be in a process of forming a base from which a new up-leg will be launched. In short, as long as it holds above the 1260 level, we’re intended to hang on to the bull case.
In summary: the market could plausibly be preparing for a push higher here, which could be taken place as soon as next week. Right now, the only news that could have really put stocks under fire would be a massive jump in oil prices. That’s being said, as long as crude oil holds below the 120 mark, there is a pretty good chance that the S&P 500 is setting up for an upward thrust that points to a test of the 1350 level.
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.
