Probabilities increasingly favor a counter-trend rebound
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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday October 09, 2008.
Stocks closed lower Wednesday at the end of a volatile session as investors doubt that the emergency 50 basis point coordinated interest rate cut will save the world. Overall it was just another bad day on the Street. Although given the current circumstances, it’d be hard for investors to stay bullish.
Notably, bonds sold off hard Wednesday immediately followed the rate cut announcement. This is, in fact, a big psychological boost for stocks because it is a sign the credit markets might be in the process of unfreezing.
Despite the overall weakness, shares of American Tower Corp. (AMT) jumped 5.37% after the company upped its annual earnings and sales goals. Just so that you know AMT was featured in our October 6 “Swing Trader Bulletin” as a potential buy candidate.
Strikingly, financial and consumer staples stocks - like Kraft (KFT), Coca-Cola (KO), Kellogg (K), and Heinz (HNZ) – took the beating in Wednesday sell-off. Despite being defensive names, consumer staples stocks have been battered because institutional traders, a.k.a. big boys on the Street, are selling what they can due to margin calls and redemptions. But why financials? It’s well-known that the ban on shorting financial stocks ends Wednesday evening so the bears can’t afford to miss the “golden opportunity”.
Chart 1.1 – KBW bank index (daily).
Looking at the seven-month daily chart of the KBW bank index, or BKX, we can see that after showing a great relative strength in the past couple of weeks - thanks to the short-selling ban – the sector is starting to slip. As you can see, Wednesday’s decline had pushed prices below immediate support at the 58.50 area. Right now the most obvious level to watch is the July closing low, about 48.50. Not only that this is a very tough support, the stochastic indicator is also indicating an oversold condition, so it wouldn’t’ surprise us to see some sorts of technical rebounds in the days ahead. Immediate resistance is about 66.50.
As goes the bank so goes the tape, so to speak. Weakness in the financial stocks dragged down the board market with the S&P 500 index lost about 11 points or 1.1% to settle near 985.
Chart 1.2 – Standard & Poor’s 500 index (monthly).
As you can see, this is about as bad as it get. The S&P 500 index gave up all of the four-year gains in merely a year. But the fact of the matter is that the price structure is so washed out that the probabilities increasingly favor a sustainable rally. Our near-term technical work suggests strongly that the down-leg that started from September high at 1303 is near completion. So there is a pretty good chance that we’re setting up for some sorts of modest rebounds soon. In fact, we’ve been looking at the 960-940 area as a downside target with the intention of buying on dips into this level.
In summary: while Wednesday’s trading action was not a true capitulation in the traditional sense, the market is so oversold that the probabilities increasingly favor a counter-trend rebound. However, until the market shows the ability to absorb bad news, ‘sell the rally’ remains the most profitable strategy.
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.
