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Further Stocks Gain Likely But Short-term Consolidation Should Be Expected
Published on: October 15, 2009 No Comment
Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.
Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday October 15, 2009.
Yesterday we said that: “our near-term work on price pattern and momentum suggested strongly that traders are committed to taking the Dow to 10000, which could take place as soon as Wednesday.” As anticipated, upbeat profit reports from Intel (INTC) and JPMorgan Chase (JPM) had helped send all three major indices to new 2009 highs with the Dow Jones industrial average closed above the key psychological 10000 milestone for the first time in more than a year.
JPMorgan’s upbeat report had helped the financial sector outperformed the broad-market in Wednesday trading session, up 3.4%.
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The graphics below are from our “U.S. Market ETF Trading Map”, which show the Money Flow measure and short-term trading range for the Financial SPDR (XLF) and S& 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).
financialspdr_20091014
Chart 1.1 – Financial SPDR (daily).
As shown, Wednesday’s massive rally had helped clear resistance at the area of September high. This is short-term positive but let’s noticed that XLF is now overbought following recent advance. While the overbought condition does not necessarily mean a decline is imminent, it indicates that some short-term consolidations should be expected. Although Money Flow measure remains positive, signals accumulation so we should expect the shares to draw in buyers in any pullbacks to the 15.40 area. In short, we remain long-term bullish on the sector and believe that a test of the 17 level, or 38.2% Fibonacci retracement of the 2007 to 2009 bear market down-leg, is likely but not before a short-term consolidation. As for support, there is a strong floor between the 15.40 to 14.55 areas.
sp500_20091014
Chart 1.2 – S& 500 index (daily).
Key technical development in Wednesday trading session was a clear breakout above the September high of 1080. This is bullish and suggesting that further short-term gains likely. Although let’s noticed that the index is now short-term overbought as it’s poking its head into the strong band of resistance between the 1100 to 1120 areas. Normally, it’s unlikely to get through that without a pause. So we should expect some pullback consolidations over the next couple of days. What we’d like to see is a light volume pullback to the 1080 area, which will set up a strong base for an advance toward the low 1100s area. At this juncture, only a close below 1080 will begin to compromise the near-term bullish outlook.
In summary, given that financial stocks led the market lower during the 2007 to 2009 bear market and were the best performers at the start of this bull market back in early March. Wednesday’s bullish breakout in the group had helped to confirm the new highs. Although the market is now overbought following recent advance so some short-term consolidations likely. What this means is that we’re remained long-term bullish and will continue purchase stocks during short-term declines in the market.
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Thanks and Good Trading!
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