Market outlook

Weakness doesn´t dissappear from the market´s sentiment. We begin a key month, October, traditionally a scenario for big sell-offs. Next week it´s important to watch over supports, such as the 10.500 points of the Dow Jones. We´ll see if the oversold status that many indexes show from a long term perspective can bring about a technical recovery.

Stocks markets start their recovery

Bonds start to fall and investors seem to flee from gold. Is that a sign for the stock markets to soar?

Market outlook

The upward trend feels threatened. Supports will decide in the coming days if it will be eventually violated.

Amsterdam´s AEX could play a key role to assess the European economies´strength

Stocks markets will have to face a difficult week, mainly due to the fact that the uncertainty continues to be the most relevant feature in the short-term scenario. Weakest European markets have spread fears on investors worldwide. As a result, nor stakeholders neither bondholders have been exempt from concerns about their investments yields. So far, gold has been the refuge for frightened people, keen to flee from risky assets. However, even metals seem to have brought about doubts on their rally sustainability.

Previous weeks, attention has focused on Mediterranean countries such as Greece, Portugal and Spain and their capability to meet their financial commitments. Their 10-year bonds incremental yields reveal their overall deterioration, which, especially in the case of the Hellenic country, could finish in default. Despite the endeavours of International Institutions, such as the International Monetary Fund and the European Central Bank, which have repeatedly stated that they strongly backed those European countries that are in trouble, the euro has consistently plunged against the dollar and other currencies. This fact demonstrates that the market shows little or none conviction about the Financial regulators ´speech.

Mediterranean countries have seen their stocks markets plummeting in the last months. The Spain´s Ibex have decreased a 26% since the first week of 2010 and the Greek and Portuguese Indexes have equally undergone severe corrections. By contrast, the Dow Jones and the Germany´s Dax have become the strongholds where money has tried to look for refuge.

Market direction could be a goal complicate to forecast in the short term. Perhaps the behaviour of the Stocks Markets of some Northern European countries could contribute to clarify a short and middle-term strategy. The Amsterdam´s AEX, for instance, has experienced so far a similar movement to the German Index. Nevertheless, last week, prices broke down its 200-session moving average, which has worsened significantly its technical situation, because this index had already a negative element: its primary rising trendline had been lost at the beginning of May.

Therefore, next week the Dutch index will have to prove its ability to be free from Southern European economies ´contagion. There are two key elements which should behave as the crucial tests to determine their future for the coming quarters: the supports of 310 and 300 points. If they eventually are broken, the bearish pressure could lead the AEX to a significant correction. Otherwise, the likelihood to recover its upward structure would remain intact.

There is a single bullish technical element that could suffice to make the AEX experience an increase in the short-term: the positive divergence that the RSI is forming. However, it will have to struggle with too many negative aspects which rule over the market´s sentiment.

The technical recommendation for the AEX is to open short positions if prices break the level of  295 points. It´s advisable to set a stop loss in the level of 335 points.

European Markets: Does History repeat itself?

The technical movement that Stock markets are carrying out is very similar to the recovery cycle that they developed in 2004. At least this conclusion could be made after the analysis of the French Index, Cac 40.

The current chart compares two different moments, 2004 and 2010, which may be considered as analogous from a technical perspective.

In 2004 the market had soared a stunning 57% since March 2003. Subsequently, the Parisian Index got stuck for the whole year in a lateral range, which in the chart appears as a 12%-height rectangle. Prices hit the support of this pattern (the zone of 3.500 points) three times. Finally, it demonstrated that it was strong enough to ensure the continuity of its rising long-term structure.

Currently, the situation is very alike. Despite the collapse of the European Stocks markets in May 2010, the balance remains, as it shows the new rectangle formed by the support of 3.500 and the resistance of 4.000 points. The first level is playing a key role in the short term because it concentrates the purchasing interest. This area has been reached for three times in the last seven months as it happened in 2004.

Despite the general weakness of the Financial Markets, if History repeats itself, the main French Index could withstand the bearish pressure. In that case, the index could deploy the same movement that in 2005 when it eventually broke the top of the rectangle, which brought about a new upward impulse that led the CAC very close to an all-time high.

Consequently, the support of 3.500 points is a key level to watch over, because the likelihood of a similar move to the one that happened in 2004 will depend on its resilience. 

The recommendation is to hold. Stop loss in 3.300 points.

Dollar against euro: The support of 1.25 is ready to try to stop the bearish pressure

The currency of the European Monetary Union has continued to demonstrated its weakness, especially after the bail-out approval that Greece is waiting for. This final decision would be key to prevent the Hellenic country from having to declare a default. However, despite the strong support that the other members of the European Union has revealed and the remarks of the President of the European Central Bank, Jean Claude Trichet, at the moment there is not guarantee that other Mediterranean economies could avoid a financial contagion.

This chart, which shows the evolution of the euro against the American dollar expresses in some way the overall situation we have just described. As we analyzed in our last report, http://timelymarkets.blogspot.com/2010/03/euro-against-dollar-european-currencys.html , there was a serious likelihood that the european currency could reach the level of 1.30. The next sessions involved a brief recovery, after a rebound to the resistance of 1.37. But, the aforementioned events brought about a sharp collapse. Even the strong support of the 1.30 has been unable to offset such a intense bearish movement.

The scenario for the euro remain downwards. The next support, placed in 1.25, should concentrate new bullish interest. Because of that, this area could be a strategic level to open long positions for those investors who are less risk averse.

The recommendation is to buy euros at the zone of 1.25. We´d close this position as long as it hits again the level of 1.30 -1.31. Stop loss in 1.23.

The Nasdaq Composite will have to struggle to keep a crucial support

Last Friday, Wall Street´s main indexes tumbled during the session´s last hour. This fact involves a higher level of technical deterioration.

So Far, North American Stocks Markets have avoided the contagion from other economies, mainly European countries, where a wide range of Indexes have collapsed, especially after the increasing financial problems that Greece has revealed in the last weeks. The credit rating downgrades that some Mediterranean countries such as Portugal and Spain received from Standard &Poor's aggravated their poor technical situation.

The Nasdaq Composite is going to play a key role this week. The technological Index has soared a 100% since March 2010. It currently keeps its primary rising trendline. By contrast, the secondary upward tendency could be threatened if eventually the support of 2.450 points is broken down.

The potential head-and-shoulders pattern that prices are starting to develop is a second negative element. At the moment, its technical situation is not dangerous enough, but if the neck line (wich coincides with the level of 2.450 points) gets lost, this movement could jeopardize its short-term rising structure.

The recommendation is to sell if prices break the level of 2.430 points. Stop loss in 2.535 points.

Dow and Dax shine among Securities markets, but they reach their goals

The Dow Jones and the Dax have demonstrated so far their resilience among the most representative worldwide Stocks Markets. As their charts show, they have been able to maintain their upward tendencies during the past two months, despite the general weakness which many Securities Indexes have been immersed in.

Nevertheless, their technical situation has begun to deteriorate, which can led both of them to look for lower goals. However, the strategy remains unchanged as it should focus to watch over the first supports: 10.960 and 6.140 points respectively.

The recommendation for the German Index is to sell if prices finally break the support of 6.140 points. Stop loss in the level of 6.350 points.

As for the Dow Jones the recommendation is to sell if prices break the level of 10.940 points. Stop loss in 11.250 points.

Dow Jones and Dax: Markets correction consequences

Last Friday alleged fraud accusations against Goldman Sachs brought about a significant correction in the Stock Markets, whose technical consequences have differed if we compare both North American and European main securities Indexes.

For instance, the most representative German Index, the Dax, has experienced a short-term scenario change towards a more bearish situation. In fact, its accelerating line is beginning to undergo a bearish pressure increase. As a result, its rising structure can be seriously damaged. The significant decrease that European Stocks suffered last week was, on the one hand, the result from a evident overbought situation that technical indicators had begun to show and, on the other, an excuse that investors had been looking for during the last sessions to make a profit-taking movement.

So far, it´s unclear which the extend of the correction could be. It will depend on the 6.140 support resilience. If it eventually can´t withstand the selling pressure, the accelerating trend will be considered as definitely lost. In that case, the decrease goal would be its primary rising trend, which passes by the level of 5.900 - 5.750 points. By contrast, if it concentrates enough buying interest, its short-term rising structure could be re-built again.

The recommendation is to close the long strategy if prices finally break the support of 6.140 points. Stop loss in 6.300 points.

The Dow Jones has demonstrated so far a healthier situation that European indexes. In fact, the 14% decline that the aforementioned banking investment firm underwent on Friday didn´t interrupt the rising movement that the most popular North American Index has been carried out since the beginning of February.

However, the fall was so abrupt, that a more intense falling technical movement could be unleashed in the coming sessions. To assess the likelihood of such a significant fall is very important to watch over the level of 10.950 points (whose role is absolutely key)  and secondly, the support of 10.850 points (by far less significant, although it should theoretically be more resilient).

The recommendation is to open short positions if prices break the level of 10.800 points. Stop loss in 11.150 points.

Coca-Cola: The 56-dollar resistance break-up would confirm a rising scenario

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The world´s largest beverage company seems to stay on a very quiet, even lethargic, movement. Its outlook appears to be weaker if we compare it with the Dow Jones´ behaviour, which this stock belong to, because, as the most popular Index of the New York Stock Exchange has been able to overtake its 2010 high level, which was touched by the 20th of January, Coca-Cola has remained very far from its analogous zone.

The main reason for this seemingly lack of dynamism should be found out on the robustness of the 56-dollar resistance, which has concentrated too much selling interest. This level has eventually become an impregnable fortress for the bullish side. Therefore, it will need a consistent effort to be hit.

However, despite the short-run scenario difficulties, this security remains upwards from a long-term perspective. The key technical element continues to be its 200-session moving average, which is a very reliable statistical element for the current analysis. In fact, since this lagging indicator was overtaken by the prices by the end of May 2009, the most logical strategy has been to keep long positions. Even the first quarter of 2010 correction was unable to invalidate the hypothesis that a new upward cycle had begun.

To sum up, Coca-Cola shows a favourable outlook for a long position strategy, despite its short-term sideways situation.

The recommendation is to hold. Stop loss if it breaks the level of 52.40 dollars. 

Google can be willing to make an upward impulse

Google has spent most of the past two months in a sideways movement. This short-term range - bound technical situation doesn't imply that the Internet search technologies company is apparently showing weakness symptoms. In fact, we must take into account that Google has risen about 129% since November 2008.

Having said that, its current lateral move seems to be a reply to its previous spectacular recovery. Because of that, its quiet technical situation could be a strategy to consolidate its substantial prices increase. Thus, its short-term intention would be to try to make a new upward impulse to reach higher levels.

Therefore, Google's scenario remains positive. There are at least two kind of elements which support this hypothesis:

First, the resilience and continuity of its rising tendency. Despite the prices correction between the beginning of January and the 25th of February 2010, when the Internet-based services and products corporation fell from the area of 629.50 dollars to the level of 520 dollars, the main uptrend has always remained intact.

Secondly, the supports of 520 and 550 dollars should supposedly play a crucial role in the coming weeks. If they have been able to prevent further falls, they could continue drawing new buyers around these levels. 

Consequently, this group of technical parametres could eventually bring about a new upward impulse, as long as the bearish positions become exhausted. 

The first obstacle is the resistance of 590 dollars. If finally this level is overtaken, the next goal would be the maximum price reached in 2010, that is 629.50 dollars.

The technical recomendation for Google is to buy. Stop loss in 519 dollars.

Allianz: As many German securities, its technical situation has improved significantly

Allianz has been one of the Eurostoxx 50 index´s components whose performance has been more outstanding int the past eight weeks. Since February the eigth, the Financial services provider has soared a 22%.

Despite the vertical increase, its technical situation hasn´t experienced any deterioration at all. So far, it has formed two consecutives higher-lows. The first one around the level of 81 euros and the next over the area of 87 euros. This investors' willingness to pay higher prices points out that the German company´s scenario is gradually improving. Currently, the prices are trying to accumulate bullish interest near the zone of 92 - 92.50 euros. As a result, this area could become a new support which would confirm its short-term upward trend.

Apart from these successive supports, there is a second crucial element: its rising channel, which has been so far an excellent framework to indicate the prices the way to follow. In other words, this channel has driven perfectly the share prices towards a substantial recovery, which has been consolidated after the resistance of 90.00 euros break-up.

The correction that Allianz has experienced this week has been very useful to diminish the overbought situations of several technical indicators, such as Williams and Stochastic. Consequently, the prices could keep upward potential yet.

The recommendation is to watch over the level of 92 euros. As long as it remains intact, a short-term investor should keep Allianz within his/her portfolio. It's advisable to set a stop loss in the area of 91.50 euros.

Citigroup has developed successive falling and rising trendlines

Citigroup´s debacle has been one of the most representative amongst the Financial securities, which in 2008 underwent a severe correction. The International Financial conglomerate that competes in corporate, consumer and investment banking, reached at the end of 2006 the level of 57 dollars in the Stock markets. However, by the beginning of March 2009, its shares price was just one dollar.

Since then, it has experienced a significant recovery (about a 332%) mainly as a result of the North American Government's $700 billion bank bailout. Nevertheless, its increase has not been homogeneous at all. In fact, if we look at its one-year chart, we realize that there have been successive upward and downward movements. Despite this apparently unclear technical situation, Citigroup has formed three consecutive supports (1.00, 2.20 and 3.10 dollars) which reveals a gradual technical enhancement.

The most relevant feature of the short-term scenario is its upward trendline which began in the support of 3.10 dollars. As long as it remains intact, coherence demands long positions, despite the fact that prices can face some correction in the coming sessions.

The recommendation is to buy. Stop loss in 3.80 dollars.

Nokia: Be attentive to the level of 12 euros. A potential rising cycle could be coming

As we´ve seen in previous analysis, most Stocks Markets have initiated a remarkable recovery since March 2009. As a result, many securities have experienced significant increases whose amount depends on the industry, the geographical area and many other different variables related to Microeconomics and Macroeconomics. 

Despite this general improvement, the mobile phone supplier has remained in a lateral situation, whose technical movement has swang between the support of 8 euros and the resistance of 11.50 - 12.00 euros. If we focus on the current chart, once the falling channel was broken up, Nokia´s technical situation can be characterized by a lasting steadiness for the whole 2009. In fact, its recovery beginning can´t be properly considered until February 2010, when bullish positions started to demonstrate that could overpower bearing interests.

The Finnish company is going to face a key level during the coming sessions. The resistance of 12 euros will decide if this security can eventually develop a new rising cycle. Some leading indicators are too overbought, which could prevent the telecom enterprise from continuing going up. Anyway, its technical outlook has improved considerably.

The recommendation is to open long positions if it overtakes the level of 12.20 euros or it undergoes a correction to the zone of 11.30-11.40 euros. Stop loss in 10.95 euros.

Spain: Its main Stock market Index, Ibex 35, reflects a troublesome economy

The Spanish Stock Market has had one of the poorest performances amongst the European countries in 2010. So far, the Ibex 35, its most representative Index, has decreased about a 7%, as the German DAX or the French CAC 40 have increased a 5% and a 3% respectively. Its behaviour seems to be more sluggish if we compare with another European indexes, especially Nordic Economies, such as Finland, whose Index HEX has soared around a 13% during the first quarter of this year.

The collapse of some of the most significant “blue chips”, such as “Santander” or “BBVA”, that plumbed 37% and 30% between January the eleventh and February the twenty sixth, has partially explained the weak situation of the Spanish market. Apart from these multinational banks, Telefonica had fallen a 19% in the same period. We have take into account that this three securities account for a 50% of the Ibex 35.

Despite this apparently discouraging situation, a fair analysis should take into consideration the fact that these stocks had a staggering recovery last year. Santander, for instance, soared a 235% in the last three quarters of 2009. Therefore, its correction of 37% should not be dubbed as “worrying” from a long-term perspective.

Once the one-year scenario has been dissected, the main question is what investor can expect for the coming months. If we examine in detail its technical situation, there are relevant elements to look at. The key level of 11.200 points is going to play a crucial role in the short term. So far, it has prevented the Ibex from carrying out an upwards movement, like the European ones we have previously mentioned. If this area was broken up, the Ibex would still keep a potential recovery.

This chart shows a second important factor that can influence the result: the psychological zone of 10.000 points behaved as a bottom two times. The subsequent break-up of the 10.750-point level could have made an impartial spectator think that the Spanish market is trying to develop a double-bottom pattern and that the falling stage could be close to an end.

However, despite this appealing hypothesis for bullish strategies, the resistance of 11.200 points, which was a phenomenal five-month support, remains decisive. If finally it´s broken up, the way to the next resistance (12.250 points) will have been cleared. Otherwise, the Ibex will stay in a range-bound situation between 10.750 and 11.200 points.

The recommendation is to hold. Stop loss in 10.680 points.

Dow Jones vs. Oil: Their positive correlation remains.

This chart shows the positive correlation that the oil has kept with the Dow Jones Index for the last two years. Both of them have shared the same falling structure and they are equally developing their respective uptrends.

However, in March 2010 it has emerged a substantial difference between Wall Street´s most representative Index and the dubbed "black gold". As the Dow Jones has been able to overtake the former resistance of 10.750 points, which was reached by the twentieth of January, the commodity has appeared to be too weak to go through its equivalent level. So far, the area of 84 dollars has behaved as a difficult hurdle to be cleared.

The technical situation analysis allows to establish a hypothetical scenario for the coming weeks: if the Dow Jones has been successful in achieving the goal of going through its analogous resistance, maybe the oil could do it as well.

The market is waiting for important economic data. On the one hand, on Wednesday it will be published the ADP National Employment Report, which is a measure of employment from an anonymous sample of about 500,000 U.S. business clients. On the other hand, on Friday, investors will know the non-farm payroll and the unemployment rate in United States.

Both of them could encourage or disappoint the current market sentiment, depending on the final figures. In any case, these data can play a crucial role in terms of knowing the result of the struggle that the oil keeps against the level of 84 dollars.

The technical recommendation is to open long positions if the oil overtakes the area of 84.80 dollars. It´s advisable to set a stop loss in 79.00.

Microsoft: Despite its slow pace, its primary structure remains upwards

Microsoft seems to have moved at a slow pace for the past two months if we compare with other Nasdaq´s securities, such as Cisco or Apple. In fact, its increase during this period (8%) has been considerable lower than these two companies, which have risen a staggering 20% and 22%, respectively. 

Despite this meagre rise, its technical situation remains bullish. As most stocks, its recovery began in March 2009. However, its most relevant moment took place two months later, by the beginning of May, when prices went through the level of 21.00 $. This break-up entailed a new upwards cycle and, consequently, the former downtrend eventually finished.

Therefore, Microsoft keeps its rising structure, which is represented in the chart by a primary tendency, whose slope is moderate (an angle of 18º). It´s remarkable the fact that at the end of 2009 the speed of its recovery increased significantly. This rhythm increase allowed this security to reach the level of 31.50 dollars before it could be expected. 

By contrast, in 2010 the company owned by Bill Gates has experienced two different moments: the first one, which involved a 13% decline, and the current short-term rebound, that is the technical element which a coherent strategy should be built on.

To summarize, investors should  take into account that Microsoft remains in a rising scenario, despite the fact that this year has not already recovered its higher levels. The mission for a short-term investor consists of watching over the first supports, placed on 28.00 and 27.50 dollars.

The technical recommendation is to hold. Stop loss in 27 dollars.

Tutorial on Technical Analysis: Does History repeat itself?

The purpose or our educational project is to make financial knowledge more accessible to students, to spread financial culture among general public and to provide regular traders with help to reduce the inherent risk to Stocks Markets. 

As a result we aim to publish a set of short descriptions on basic concepts related to Technical analysis, which is one of the most interesting disciplines used by investors to deal with their daily key dilemma: Should I buy or sell a security?

Technical analysis is as technique for examining a security´s series of historical prices in order to forecast its future behaviour. 

This method consists of a comparison between both its current and its historical price, so that a likely evolution could be determined in advance.

This field of study is based on a hypothesis: that history repeats itself. Having said that, by analyzing the past we can infer a probable security´s future price. Consequently, Technical Analysis considers that Psychology plays a crucial role in the Stocks Markets and that the final price is the result of many human elements´ interactions. From this perspective, the evaluation of past psychological situations acquires a considerable relevance. If the analyst understands how a mass of investors behaved in the past, it can try to foresee the future in so far as a potential analogous market moment is coming.

To understand our approach, look carefully to the next chart, where we propose two possible similar scenarios on the CAC 40´s French index. Even both situations could be subdivided according to an intermediate or short-term perspective. So far, it´s obvious that it´s too early to appreciate if both chronological moments can really be considered analogous.

In March 2009, a new uptrend appears to emerge. But will the CAC 40´s next market movement soar as it happened from 2004 to 2007?

We invite you to express your viewpoint on this issue by linking the proposed case with the Analysis Technical Principle that “the future can be found on the past”.

This first introductory concept involves an essential pillar to understand the whole content of this website. All questions are very welcome. So feel free to ask us for any clarification.

Apple: Prudence must be the strategy after an all-time high is achieved

The recovery that Apple Computers has experienced in the past year is really impressive.

Its behaviour is exactly the opposite to what had happened in 2008, when the collapse of the Stocks Markets had undergone an accentuation by the last quarter of that year.

Nevertheless, at the beginning of 2009, a tripple-bottom was formed around the area of 82 $, which confirmed a reversed pattern and, therefore, a cycle shift.

From that moment, the second quarter of 2009 began with a staggering increase for the securities of the American multinational corporation. Apple climbed around a 60% since March to May 2009. Nevertheless, its uptrend didn´t finished after this remarkable achievement. In fact, it continued to soar for the next ten months.

During the session of March 25th 2010 the computer manufacturer reached the level of 230.97 dollars, that´s an all-time high, which accounts for a 180% rise from a year ago.

However, this stock is beginning to reflect some exhaustion. The RSI is showing negative divergences, which could involve a significant short-term decrease. Besides, the channel bottom could behave as a strong resistance, which could interrupt such a enormous appreciation.

The technical recommendation is to sell at the current prices. Stop loss in 236 dollars.

Euro against dollar: European currency´s weakness could lead it to the level of 1.30

As we anticipated some sessions ago, http://timelymarkets.blogspot.com/2010/03/euro-against-dollar-goal-is-achieved.html there was a couple of technical reasons to think that it would be very difficult for the European currency to go over the level of 1.38 dollars per euro. This zone concentrated a huge bearish interests. First all, because of the powerful resistance that prices have formed around this area. Secondly, because the main technical element, the falling channel, was too influential in the middle-term scenario. Consequently it coudn´t allow the euro to have a sustainable recovery. Finally, the classic indicator Momentum was completely overbought.

Afterwards, the support of 1.35 break-down has confirmed the euro falling scenario. There is not relevant supports from a short-term perspective until the level of 1.30, which coincides with the channel bottom. This area could again draw new bullish interest, taken into account that technical indicators could be oversold by then.

The technical recommendation is to open long positions on the level of 1.30-1.3050. Stop loss in 1.2860.