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 November 20, 2009.
Stocks closed significantly lower on Thursday with the major indices down more than 1 percent as investors appear to be turning cautious after new data showed mortgage delinquency rates and foreclosure rates not only jumped in the third quarter, but reached record highs. The same report also said the trend that will likely continue into next year.
Also contributed to the overall weakness were the stronger U.S. dollar and report that Bank of America’s Merrill Lynch cut its 2010 growth outlook for the semiconductor sector and downgraded 10 stocks in the group, including Intel (INTC), Texas Instruments (TXN) and Marvell Technology (MRVL). The Semiconductor HOLDRs (SMH) lost more than 3 percents as a result.
The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for SMH and S&P 500 index. As shown, the light-blue shading represents the short-term trading range. A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).
Chart 1.1 – Semiconductor HOLDRs (daily).
After a strong run of outperformance since early March, SMH rolled over and lagged the broad market by a wide margin. As you can see, not only it did not follow the S&P to new highs, Money Flow measure has been trending lower from the below the zero line over the past couple of months, signals heavy distribution. This is bearish and a retest of the bottom of its short-term trading range will most likely ensue. Although let’s notice that Thursday’s selloff seems to be overextended, so we should expect at least an attempt to rebound to the area of Thursday’s downside gap, about 25.94.
Thursday’s selloff was broad-based with all ten major sectors in the S&P closed in the negative territory. As a result, the S&P 500 index undercut the important psychological 1100 level and closed near the intraday low. In fact, as the below chart suggests, the broad market index is in for a retest of key broken resistance turns into support.
Chart 1.2 – S&P 500 index (daily).
As shown, the index broke resistance at 1080, or the September high, with a big surge to new high on November 9th. Last week, this level was retested and held. It was then became a key support level. Although after breaking decisively below the important sentiment 1100 level on Thursday, the S&P is once again setting for another retest of 1080. A failure to hold above that level will break the November uptrend and raise the odds for a test of the bottom of its short-term trading range. Immediate resistance is about 1114. A close above that level, though it’s unlikely tomorrow, will resume the uptrend.
In a longer term however, the bulls shouldn’t get into any serious trouble as long as Money Flow measure stays positive and prices hold above the November low of 1029.
In summary, recent trading action suggested strongly that risk aversion is coming back to the market. So it seems to us that Thursday’s decline could be a beginning of the long overdue downside correction. What this means is that there is a higher than average odds that the selloff will momentum but a much deeper slide is needed to break the long-term uptrend.
Thanks and Good Trading!
(By: Michelle Mai for Capital Essence)
© All rights reserved and actively enforced.