Another Rally Attempt Likely

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 26, 2011.

Concerns over Spanish banks drove stocks lower Tuesday morning with the S&P 500 down as much as 0.8%. The market however, managed to trim losses in the final hour of trading to end flat amid ahead of the President’s State of the Union speech in Tuesday evening.
For the day, the Dow Jones Industrial Average fell 3.33 points, or 0.03%, to close at 11,977. The S&P 500 gained 0.34 points, or 0.03%, to close at 1,291. The NASDAQ rose 1.70 points, or 0.06 %, to close at 2,719.

Restaurant stocks attracted strong buying support after Miller Tabak & Co raised rating on Cheesecake Factory (CAKE) to buy from hold. As such, shares of P F Chang’s China Bistro, Inc (PFCB) advanced 1.6% on above the daily average volume to 47.70. This is bullish from a technical perspective. In fact, as the chart below indicated, PFCB could climb above 65 and test the 5-year high after the downward trend halted. Just so that you know, initially profiled in our February 24, 2009 “Swing Trader BulletinPFCB had gained nearly 150% and remained well position.

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The graphics below are from our “U.S. Market ETF Trading Map”, which shows the near-term technical bias for PFCB and the S&P 500 index. As shown, the underlying is in a short-term bullish trend when the price bars are in green. The underlying is in a short-term bearish trend when the price bars are in red. And yellow bars identify period of neutral or sideways trading pattern.
Additionally, 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 – P F Chang’s China Bistro, Inc (weekly)

As indicated in the above chart, PFCB had retraced more than 61.8% of the 2005 to 2008 major downswing, clearing an important hurdle based on Fibonacci levels. The fact, that the December correction only took prices to 46.30 before gave way to a new upleg indicated an underlying strength. This suggests that the entire downtrend will eventually be retraced.
Right now, the most important thing to look for is trading action near the December high of 53.39. That level represented a major price resistance. A bullish perspective is that a sustain advance above it could rapidly push prices up to the next level of resistance near 65, or the summer 2005 high.
Buyers however should be aware that Money Flow measure had turned negative following recent selloff. So we’d be cautious against taking large position at this stage of a rally.
Support is at the trend-line moving average (as represents by the white line in the chart) near 45.60. Only a close below that level can wreck the near-term bullish outlook.

Chart 1.2 – S&P 500 index (daily).

We have pointed out in the previous Market Outlook that “while Monday trading action looked and felt very good, it did not have the characteristic of a bullish breakout day. It’s rather a continuation the short-term consolidation pattern that started on January 12, 2011.” Trading action so far has confirmed this view as the S&P rebounded strongly after Tuesday decline found support at 1280. Money Flow measure had trended higher from above the zero line and is fast approaching the December peak.
Psychological resistance is at 1300. A clear break above that level could trigger a major buy signal that targeting the upper border of the September rising channel.
Support is at 1280. The near-term technical bias remains bullish as long as the S&P holds above that level.

In summary, the S&P remains confined to the 1280-1300 trading range. Not only that the short-term technical bias is skewed toward greater strength than weaknesses, the positive seasonal bias is another near-term plus for the bulls. Therefore, it should not be surprising to see at least another rally attempt in the coming days.

Thanks and good trading.

(By:Michelle Mai for Capital Essence)
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