More Backings and Fillings Likely

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 June 29, 2009.

Last Monday we’ve said that: “short-term trading pattern on the S&P 500 index exhibited a top formation, which suggested that a meaningful correction could be underway… expect at least a test of 880.” As anticipated, stocks failed to follow through to Thursday’s recovery rally after the government reported that consumers are saving their money at a feverish pace. The news sent stocks lower on concerns that the rising saving rate will put a break on the recovery people are looking for. As a result, both of the Dow Jones industrial average and S&P 500 index closed down for the second week in a row, down 1.2% and 0.3% respectively. Clearly, the “green shoots” rally, which pushed the S&P up by 40% since its March low, is losing steam. So until the news flow starts to improve, the market could be drifting sideway into the Independence Day.

Notably, the tech rich NASDAQ Composite outperformed its counter parts, ended higher on the day and week. Thanks to strength in the big names like Google (GOOG), Apple (AAPL) and Palm (PALM). Shares of PALM surge 15% Friday on huge volume after the smart phone maker reported fourth quarter results that were well above Wall Street’s consensus estimates. In fact, you could be sitting over 100% gains right now if you’ve bought the stock immediately followed our March 20 and June 10 “Daily Trading Ideas” bullish signals.

Chart 1.1 – NASDAQ Composite (daily).

Looking at the daily chart of the NASDAQ Composite, we can see that there is currently a run toward the June high after a pullback to key support at the 1760 area, or the white line in the chart, was met with a new wave of buying interest. Right now the most important thing to look for is a test of resistance at the 1880-1947 areas. This is a significant price level so we could see more backings and fillings over the next couple of days. Immediate support is about 1763. A close below that level could trigger a short-term sell signal with a downside target around 1670.

Key technical development in last week trading was the “Golden Cross” – the 50-day moving average crossed above the 200-day moving average – on the S&P 500 index.

Chart 1.2 – S&P 500 index (daily).

After broke out above the 200-day moving average in early June, the S&P corrected lower in a reasonably fashion to ‘kiss’ the breakout level good bye. So far, the ‘kiss’ had been successful with the 50-day moving average crossed above the 200-day moving average. This positive technical formation suggested strongly that a significant low has been established. So we could see a retest of 950 soon. That, if taken out, could trigger acceleration toward the important sentiment 1000 level. Immediate support is at 900. Given that most positions were initiated around that level, all bets are off if there is a close below it.

In a longer term however, a legitimate bull market requires the 200-day moving average to trend higher. Clearly, that is not the case, at least for the time being. So we can not rule out a retest of the lows. Right now the most important thing to look out for is a sustain breakout above the important sentiment 1000 level follows by a subsequent retest of March low. That, will hold, will add more weight to the view that a major bottom has been seen.

Bottom line, stocks likely to break to the upside in the short term but the bigger picture, the structure of the market in terms of price movement, sentiment and momentum, demands further healing. So we could see more backings and fillings over the next couple of weeks.

(By: Michelle Mai for Capital Essence)

Note: Michelle Mai writes technical analysis for Capital Essence and is the editor of Capital Essence’s newsletters. To receive the daily edition, please subscribe. It’s now available at a monthly rate.

Tags: AAPL, Apple, COMP, Golden Cross, GOOG, Google, NASDAQ Composite, PALM, s&p 500 index, spx