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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday May 19, 2009.
Stocks rallied Monday after a new batch of upbeat economic data encouraged investors to step back in to the market after last week’s selloff. The Dow Jones Industrial average added 235 points or 2.85% on the day. It worth noticing that trading volume was extremely light and many big buyers in Monday trading session were traders who missed or lagged the March rally. Indication is that buying enthusiasm is not as great as the point moves indicated.
Notably, shares of Bank of America (BAC) jumped 10% after the bank was upgraded to “buy” by Goldman Sachs (GS). In fact, our “US Market Trading Map” was looking at BAC from a buy side back in March 18. And if you’ve bought the stock immediate followed the buy signal, you would be sitting on 60% gain right now.
Chart 1.1 – Bank of America (daily).
As shown, after a nice rally, BAC pulled back to key support level that has been previous successful in repelling price action. Monday bullish trading action had helped setting the stage for a retest of January/May resistance, about 15. That, if taken out, should trigger a massive rally directly into the area of December high, about 18. Immediate support is about 10.10, or the white line on the chart.
Also contributed to the overall optimism was news that Macy’s (M) was added to the Conviction Buy List at Goldman Sachs and the better-than-expected quarterly results and upbeat earnings outlook from Lowe’s (LOW) and Dillard’s (DDS). The SPDR S&P Retail (XRT) gained 3.9% as a result.
Chart 1.2 – SPDR S&P Retail (daily).
Above we’ve highlight our short-term trading range of the XRT. As indicated in the chart, the red and pink shadings represent the overbought zones. When the price moves into or below the green shading, the sector is considered oversold. As shown, the sector had moved into the oversold zone in recent days followed the early May’s pullback consolidation, which represented the digestion period in the aftermath of March’s massive rally. Once prices moved into the green zone, we finally saw an oversold rally that many investors have been waiting for. In fact, Monday’s strong bounce had helped pushing XRT back into its normal trading range. So we should expect a rally back to the top of the uptrend channel that has formed over the past couple of months. A close above 26.90 will confirm this. Immediate support is about 25.20. At this juncture, only a decline below that level will begin to wreck the near-term bullish outlook.
Strength in financial and retail stocks helped carry the S&P 500 back above the important sentiment 900 level as the broader market’s advancing issues outnumbered its decliners by 10-to-1.
Chart 1.3 – S&P 500 index (daily).
We’ve pointed out in the previous Market Outlook that the S&P 500 index was sitting at a “key inflection point” that could help identify which direction the market will trade over the next couple of weeks. The action so far this week favors the bulls as the index bounced nicely off of the support offers by the uptrend channel. An upside follow-through tomorrow will confirm today bullish trading action and a retest of key resistance at the area of May high should be expected. If we can break above that level, higher prices will most likely ensue. That’s said, a sustain breakout above the May high will trigger all sorts of stops and thus a test of the important psychological 1000 level is inevitable. Immediate support is about 880. As mentioned, this is a very important support. If we get a close below it, then we could go straight down into the 830 region.
In summary: after a much needed consolidation that took some excessive bullishness off the market, stocks, as represent by the S&P 500 index, are moving higher once again. Right now sustainability is the critical question. If the market can continue rally past the May high at the 930 level on the S&P, then we could go straight up to 1000 by the end of May, or the first half of June.
Thanks and Good Trading!
(By: Michelle Mai for Capital Essence)
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