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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday August 24, 2010.
Stocks rose Monday morning with the major indices climbed almost 1% as investors moved back into the market after some signs of new merger and acquisition activity. The rally however, ran out of steam and the market slipped lower to settle near session low. For the day, the Dow Jones industrial average lost 39 points, or 0.4%, to finish at 10,174. The S&P gave up about 4 points, or 0.4%, to settle at 1,067. The NASDAQ Composite dropped 20 points, or 0.9%, to close at 2,160.
Monday’s trading action, as a matter of fact, had helped confirm the validity of the “sell the rally” scenario that we’ve traced out in the previous Market Outlook when we wrote that: “given that the longer-term technical bias has turned down after the August 11th wide range bar down day…rallies should be considered as opportunity to sell short or trim long position as far as we’re concerned.”
Notably, defensive-oriented stocks attracted strong buying support. Consumer staples and utilities sectors finished with a 0.2% and 0.7% gain respectively. Indication is that risk-aversion is now the predominant theme. Speaking of consumer staples, shares of Del Monte Foods Co (DLM) added 0.4% to 13.15. This is bullish from a technical perspective. In fact, as the chart below indicated, the stock could climb up above 16 and test the 52-week high after the downward trend halted. Just so that you know, initially profiled in our March 2, 2010 “Swing Trader Bulletin” DLM had gained about 10 percents and remained well position.
The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for DLM 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 – Del Monte Foods Co (daily).
As indicated in the above chart, DLM rebounded nicely off support at the bottom of its short-term trading range near 13. This level is roughly corresponded with the early March upside gap. This is a short-term positive. Additionally, Money Flow measure had also been diverged from price action since early July, indicating that the downward trend is easing. This increases the probability for a test of resistance at the area of the trend-line moving average near 13.90. If it manages to close above that level and move higher, then it could go straight up to the next level of resistance near 16, or the 52-week high set in early April. Support can be found around 12.50.
Chart 1.2 – S&P 500 index (daily).
As shown, the S&P continues basing sideways near support at the 1075-1057 area. Although short-term momentum is fast approaching an oversold territory, Money Flow measure has trending lower from below the zero line, indicating that there isn’t much of an appetite to get into stocks. This is not very encouraging and if we continue to see that then it will reinforce our bearish view that this correction could eventually take the S&P back to the July low. Right now the most important thing to look for is price action around the 1057 area. If the index posted a close below it, then there is not much that would stop it from dropping further. Resistance is at 1100. Although unlikely at the moment, a close above that level would turn the short-term trend up and bring the August high into view.
In summary, while the near-term technical bias is currently tilted toward greater weakness than strength, the short-term momentum is fast approaching an oversold territory, suggesting that the market will need to base for awhile before the bears regain strength for another attack. So traders should not be surprised to see additional consolidation unfold between 1075 and 1057 levels in the S&P 500 index. The 1057 level represents a major price support and if declines are seen below it a massive new downswing in price will follow.
(By：Michelle Mai for Capital Essence)
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