S&P Hit Short-term Capitulation Point
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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 8, 2010.
Stocks fell sharply Friday morning and traded in the negative territory for most of day with the Dow Jones industrial average lost about 160 points at its low of the day as worries about a growing debt crisis in Europe exacerbated uncertainty about the U.S. economic outlook. The market however, managed to put together an impressive recovery rally that pushed the major indices above the zero line by the close.
The U.S. dollar has played a key role in the market action of the past couple of weeks. This was clearly evident in Friday afternoon’s strong reversal, as a pullback from 6-month highs in the dollar index coincided with a sharp short-covering rally that erased triple digit losses in the Dow. In fact, as the chart below suggested, although the overall technical backdrop is currently favors the bullish case, recent advance appeared to be overextended so we should expect at least a short-term pullback correction. That, if and when it happens, is positive for the dollar denominated assets such as oil and gold and also stocks.
The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for the PowerShares DB U.S. Dollar Index Bullish (UUP) and the 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 – PowerShares DB U.S. Dollar Index Bullish (daily).
As shown, UUP is now nearly as overbought as it was at some of the worse point of the financial crisis. It’s currently trading above the top of its short-term trading range, which didn’t happen since the market bottomed last March. So it wouldn’t surprise us to see some short-term pullback correction over the next couple of days. Seller however, should be aware that Money Flow measure had broke out above the December peak, signaled strong accumulation. Additionally, there is a strong band of support between the 23.20 and 23.02 levels, or the December high and the white line in the chart. So, if it’s headed there and we think it will, that would be a formidable support area. Immediate resistance is at 23.77, or last Friday high. A close above that level will opening up for a test of 24, or the 50% Fibonacci retracement of the March-December down-leg.
Chart 1.2 – S&P 500 index (daily).
Friday was clearly an extremely volatile day with the S&P lost nearly 20 points at its intraday low but only to recover aggressively in the last hour of trading to end the day in positive territory. With no trigger for the abrupt turn, one of the most educated guesses to Friday vicious move was that the market could have hit a short-term capitulation point. That, if true, suggested that there could be room to the upside. Right now, it seems to us that this rally may continue to the next level of resistance between the 1071 and 1083 levels. A sustain break out above that level, could trigger a massive short-covering rally, which has the potential propel prices directly into the 1106 level, or the white line in the chart. Buyers however, should be mindful that fake-out moves are frequent in counter trend correction, thus, a break below Friday low of 1044 will push the index straight into key support at the 1030-1020 areas.
In summary, it’s possible that the market has finally hit a short-term capitulation point. Right now follow-through is the key. We’ll be looking for an upside breakout above resistance between the 1071 and 1083 levels on the S&P 500 index and a pullback in the U.S. dollar as a confirmation and extension of Friday’s vicious move.
Thanks and Good Trading!
(By: Michelle Mai for Capital Essence)
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Note: Michelle Mai writes technical analysis for Capital Essence. To receive the daily edition, please subscribe. It’s now available at a monthly rate.
Tags: debt crisis, dow jones industrial average, Europe, PowerShares DB US Dollar Index Bullish, s&p 500 index, spx, U.S. dollar, UUP
