Money Leaving Tech for Commodities

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 Monday May 11, 2009.

Stocks closed Friday trading session with a solid gain amid a better-than-feared job report. Eight of the ten economic sectors posted a gain. Financials led Friday advance, up 8.3%. The strength in financials came after the government announced the results of its much anticipated stress test on 19 major financial institutions.

Speaking of financials, shares of Wilmington Trust (WL) soared more than 12% Friday. As a matter of fact, this had confirmed the validity of the “bullish case” that we’ve offered in our May 7 Market Outlook. Note: initially profiled in our April 8 “CEM News – Daily Trading Ideas” buy list, the Mid-Atlantic regional bank had gained nearly 80% and remains well position.

Chart 1.1 – Wilmington Trust (daily).

Looking at the nine-month daily chart of WL, we can see that the 19 level continues to act as price magnet. As mentioned, this is a significant resistance with the confluence of the 38.2% Fibonacci retracement of the 2006-2009 declines and the November low. The near-term technical outlook remains positive but let notices that the stock had got extremely overbought so some sorts of short-term setback is necessary. So, we’re looking forward to a pullback to the 13.30 level, or the white line on the above chart, which will setup a much more potent buying opportunity.

Commodities continue to show resilience, after lagging the board market for many months. Speaking of commodities, shares of Freeport-McMoran (FCX) jumped more than 14% immediately followed our May 1 bullish comment or more than 32.4% since profiled in our April 30 “Swing Trader Bulletin”.

Chart 1.2 – DB Commodities Index (daily).

After hitting a multi-year low in December, the DB Commodities Index (DBC) had been reluctant to find a trend, resulting in a trading range pattern. Last week trading action was very encouraging however. the index had rallied back to the March high and may be setting up for a major breakout. Although it’s pretty much overbought and price has risen more than 12% in the last two weeks, so some sorts of pullback consolidation is likely. We’d like to see a light volume pullback to the March trend-line, just above 20, which will setup a strong base for an advance toward January high at 22.89. At this juncture only a close below 19.10 will begin to compromise the near-term bullish outlook.

After a strong run of outperformance since early January, technology stocks have steadily outperformed the overall market. Since then, however, tech stocks have faltered and underperformed the board market by a wide margin in the last two days.

Chart 1.3 – NASDAQ Composite (daily).

As shown, the “US Market Trading Map” is currently bearish on the NASDAQ. In addition, it’s on a verge of breaking below the March rising trend-line. A downside follow-through this week would be a definite crack in NASDAQ’s current uptrend and the stock market as a whole. Immediate support is about 1700. A sustain decline below this will trigger a massive decline into the 1583 area, or the white line on the above chart. Only a close above 1773.13 will wreck the near-term bearish outlook.

The broad market index, S&P 500, shows little sign of slowing down, even though it has reached a frothy level.

Chart 1.4 – S&P 500 index (daily).

As indicated in the above chart, the S&P has rallied directly into the area of January high followed a bullish breakout above the February high last Monday. Right now the level to watch is the 940 level. This, if taken out, will trigger acceleration into the important sentiment 1000 level. On the downside, the 900-875 area should now represent support.

In summary: money continues leaving tech for commodities. Given that the NASDAQ had gained more than 500 points or nearly 40% from its March low, a pullback would be neither surprisingly nor unhealthy. Although consider that China recovery/stimulus is the driving force behind commodities rally, it seems to us that market is getting ahead of itself so we could be at risk to a big decline.

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.