Still a Stalemate

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 1, 2009.

Yesterday we said that: “while Wednesday trading action was very encouraging, the last hour selling efforts suggested that an initial test of the S&P 875 level had been rejected.” As anticipated, stocks ended lower Thursday as weakness in energy and financials stocks offset strengths in technology and materials sectors.

Notably, material stocks caught a bid in Thursday trading session. Shares of Freeport McMoran Copper & Gold Inc (FCX) jumped more than 4% to 40.96. Note: the stock was profiled in our previous “Swing Trader Bulletin” as a potential buy candidate.

Chart 1.1 – Freeport McMoran Copper & Gold Inc (daily).

FCX is in an interesting spot right here for several reasons. First, as you can see, the “US Market Trading Map” was looking at FCX from a bullish side back in early 2009. It’s worth noticing that the copper producer had gained more than 100% during this period. Secondly, the overbought correction that started from April high at 46.22 had found support at the 38 level, or the white line on the chart. This level had been previously successful in trigger a strong rebound. So we should expect a retest of the April high soon. Only a sustain decline below the weekly low at 38.18 will begin to wreck the series of bullish higher-high higher-low pattern going back January 2009.

Chart 1.2 – Materials sector SPDR (daily).

The Materials sector SPDR (XLB) had been in a nice uptrend since early March. This is very encouraging. Although Thursday’ upside breakout had pushed prices directly into the red zone, or overbought territory. So we should expect some sorts of pullback consolidation over the next couple of days. In short, while XLB had got overbought and future price weakness is likely, the “US Market Trading Map” stills bullish on XLB, so expect the ETF to draw in buyers in any pullbacks to support around the 21.58 area, or the white line on the chart.

Chart 1.3 – S&P 500 index (daily).

Key technical development in Thursday trading session was that the S&P crossed above the important 875 level again but failed to close above it for a second day in a row. This is not very encouraging. So, as mentioned, the bulls really need to get over the 875 level soon or the market will fall under its own weight. Immediate support is about 847. A failure to hold above this will trigger a massive sell-off that has the potential pushing prices back into the 800 level.

In summary: like yesterday, Thursday trading session stills a stalemate. The bulls done a good jobs in pushing prices above the 875 level on the S&P 500 but they’ve not been able to hold on to this level into the close. And we’ve basically another sideway trading day. So, more likely, the market will skirmish fiercely around the 875 level tomorrow. A close above this level will trigger a series of buy signals; while a close below today will put the bears into the driver side of the market.

Thanks and Good Trading!
(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.