Weekend Analysis for Fri July 18th 2008

Fri July 18th 2008
The Week That Was: Oil Breaks.. Banks Show Better Earnings
by Jack Steiman

There were two very distinct happenings this week on wall street which bodes well for the economy and for the stock market, not that the road ahead is going to be easy if your bullish. The bulls can, however,  take away the breakdown in oil below two critical points of massive support. First it lost its trend line support at 135 and then it's critical 50 day moving average at 132.40. Once it broke, which coincided with a loss of 107.00 on the Uso, the commodity went in to free fall. It was no accident that once oil lost 135 the market started to move higher and once it lost the 50 day it accelerated those gains. Oil has had every bit as much to do with this bear as the financial crisis has. There's no way to quantify which has more weight at the moment but you can't argue with how the market immediately responded once oil lost those important support levels. When we look outside of oil we see the big three banks that reported great earnings that absolutely no one expected. Jpm, Wfc and the real surprise, C all reported far better earnings than expected. Wfc even raised their dividend by 10%. A very powerful one two punch to the jaw of the bears that saw the Dow have its best run in a very long time. Yes, there were headaches that caused the Nas to under perform in the form of poor earnings from Msft and Goog. So while it wasn't all good news it certainly was a week the bulls can feel very good about. Oil and Banks. A nice winning combination.

I think it would be good to spend a moment here talking about the breakdown in oil and what technically occurred today to say the move lower is for real. Whenever a stock or an index either break down or breaks out it is natural for that occurrence to get a retest that succeeds in confirming the move. Oil truly broke down when it lost 132.40 or the 50 day moving average at the time. Today oil shot up early over two dollars and came very close to 132. From that point you want to see the sellers come in and push it back down to confirm the breakdown. You certainly don't want to see it shoot right back up and recapture what it just lost. The sellers did arrive on cue and oil finished in the 128's. Perfect retest action that confirms the breakdown. I'd suggest you follow the message accordingly. Always do what's best for you of course but if you're very bullish on oil right here, at least allow yourself to recognize the red flag today's action sent up.

We're in the middle of earnings season and there's always going to be nights when the earnings are poor and the key is how the market behaves when that happens. The question becomes how well can the market hold up in terms of will the money leave the market completely or will it transfer to other areas and thus keep an overall bid under equities. Even though we had two huge disappointments last night from Msft and Goog, two huge heavyweights, the money stayed in the market today. The Sp was flat and the Dow slightly green even though the Nas/Ndx took it on the chin, although they were flat for the day once the gap down occurred. It closed where it opened thus there were plenty of buyers once things sold off out of the gate. Good action. No one should have been surprised if the Nas/Ndx sold off all day but they did not and that's overall fairly bullish for the near term. The door was open. The excuse there. The bears didn't take advantage of it.

The Sp lost 1240 only to recapture it right back once the good news started to hit. The fact that it took back that lost support level so rapidly is good news but that 1240 level should now be very strong support and thus there's no excuses near term for the bulls. That level is their spring board on any selling. They need to and should be able to defend it thus allowing the market to rise overall in the near term. 1260 is trend line resistance and where the Sp is currently fighting. Beyond that is tougher resistance at 1275. That won't be easy but far from impossible. Should that level get taken out we're looking at 1305 or thereabouts. 11,650 to 11,750 is big for the Dow. That won't be easy to break through but we'll see. For now 1260 and then 1275 really need to be watched for more insight.

The bear market is still very alive folks. When you see stocks get punished to the depths of which Goog and Msft were today, just to name a few from the recent past, you have to respect that message. When bear markets are truly over you don't see that type of annihilation. At that point all the bad news is in and stocks can't fall any more. That may be the case in some areas of the market. Banks seem to be putting in some type of bottom along those lines. They can still fall but clearly they have been crushed and good news is being seriously rewarded which is always good to see while bad news isn't having quite the same effect as it did a few months back. That tells you that sector may be mostly washed out, at least near term. It doesn't guarantee that longer term but it does talk for the very near term.

Some exposure is appropriate in this market but nowhere near a full portfolio's worth of investing or trading. You must still march slowly and it would be best if once this hoped for rally completes itself, we go back down and see what type of divergence can form on those critically important daily charts. If they can put in positive divergences on the next bout of selling to come then getting more aggressive will be the right move to make. Tread slowly and take it one day at a time here. The waters are murky. Things are unclear. Never overdo it until those daily's tell us to.

Have a great weekend and play with some kids.

Peace

Jack

• Intraday Swing Trade Alerts
• Action-Oriented Trading Advice
• Detailed Guidance for Each Trade
• Technical Chart Analysis of Stocks/Indices
• Market Timing from a Pro