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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 24, 2008.
Another day, another wild ride. The Dow Jones industrial was drifting into negative territory Friday afternoon after Citigroup (C) CEO shot down the rumors that the trouble bank was putting itself up for sale. But unlike much of the week, when the markets sold off and ended at the lows of the day, stocks managed to snap back in the last hour of trading as reports about the President-Elect Barack Obama’s nominee for Treasury Secretary circulated. The Dow spiked as much as 519 points after NBC News reported New York Fed President Tim Geithner would become the next Treasury Secretary.
General speaking, the late-day rally was the combination of the technical oversold condition and the Geithner report. However, given the poor fundamentals, the market could have remained oversold for sometimes if the Geithner report had not started circulating Friday afternoon.
Notably, shares of Dell Inc (DELL) were under pressure Friday, down 5.2%, despite the better-than-expected earning reports.
Chart 1.1 - Dell Inc (weekly).
Looking at the nine-month weekly chart of DELL, we can see that the stock shed more than half of its market cap, in just 3 months immediate followed our “Trend Forecaster” bearish signal. As you can see, selling has accelerated after the February-April lows were taken out. The first wave of selling – from September into late-October was a decline of 43% (from 18.82 to 10.59, roughly). Many traders thought that was the bottom because of the historic oversold conditions that existed at the time. However, oversold was getting even more oversold. The stock broke down decisively, lost another 35% (from 13.32 to 8.72, roughly) after a rally into the 20-day moving average was met with an aggressive wave of selling interest.
What we find totally amazing about the stock is that the monstrous oversold conditions of October had little or no effect generating a snap back rally. This is very bearish and suggesting that the path with least resistance is down. At this juncture, only an advance above 13.32 will begin to wreck the near-term bearish outlook.
With the market having one of its biggest points gain ever, the question to ask is ‘can we expect the selling to be done?’ And for this question, we have a simple chart to follow:
Chart 1.2 – CBOE Volatility index (daily).
It’s quite interesting that the CBOE Volatility index, or VIX, couldn’t make it to its October extremes along with the indices. This is bullish for stocks. However, the VIX would have to fall below the August trend-line, now about 54, in order to violate the current uptrend. This, if and when it happens, will give us an intermediate-term buy signal for stocks.
The S&P 500 printed a massive bullish reversal pattern on the daily chart as volatility tanked. The board market index jumped 6.3% to finish at 800. Strikingly, the move was supported by relatively heavy volume. Nearly 2.4 billion shares traded hands on the NYSE Friday compared with the daily average volume of 1.5 billion shares.
Chart 1.3 – S&P 500 index (daily).
Current price structure suggested strongly that the down-leg that started from November 4 high at 1005.75 had been completed and the market is in an early stage of a potent recovery rally period that points to a test of the 845 level, then all the way to 1005. An advance above 820 will confirm this. Immediate support is at the area of Friday’s low, about 741. At this juncture, only a sustain decline below this level will begin to wreck the near-term bullish set-up.
In summary: the boarder market index, S&P 500, is technically indicating extreme favor to the upside. And vicious snapback rally into the end of the month is, therefore, expected.
Until next time, good luck.
(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.
