by Jason Ng, Founder, Master ‘O’ Equity

FUNDAMENTAL ANALYSIS
Stocks were up today despite a greater than usual contraction on the ISM index, which reports on manufacturing growth, down to 49.3%. A figure below 50% indicates contracting manufacturing growth in the country. Evidently, the manufacturing capital of the world has already started to cast its effects all over the world and the rest of the world need to learn how to work with and grow with it. The main piece of good news that contributed greatly to today’s continued gains is the lower than expected core PCE deflator, an inflation indicator which the Feds watch intently. The indicator reported only a 0.1% rise which is fantastic considering the year on year increase of 2.2%. This shows that inflation is indeed under control, especially so when the indicator has been increasing slower over the last 3 months. Nothing assures investors more than a controlled inflation and interest rates under control.

TECHNICAL ANALYSIS
Completely no surprise in the market actions today, technically. The Dow made yet another historical high as we have predicted last week when it ditched and the Nasdaq composite continued its journey up in a slow and steady fashion. Both indices are showing growing upside momentum while still not in the short term overbought region. This shows that there are more upside to go before the Dow pause to form another step in its staircase formation and the Nasdaq composite has to struggle at its 2500 resistance level once again. Many investors are concerned about the contraction in volume in the Dow today and deems it too early in a push for volume to be drying up. That is actually a false concern. The rally in the Dow so far has been a series of short term bursts and contractions in what I call the “staircase formation”. It is not strange to see a burst and then contraction a couple of days later at all. That’s the Dow game plan and as long as trend lines remain intact and the chart pattern maintains its integrity, there are no sense in finding bones in an egg at all. Oil challenged the $59 level today and failed, falling down $0.74 for the day, forming a shooting star candlestick formation… a strong bearish formation. It is always interesting to see such a candlestick formation when the sentiments on the streets remain bullish… lets see who wins the race…

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FUNDAMENTAL ANALYSIS
Markets were up marginally yesterday as investors show slight signs of bullishness ahead of the FOMC release today along with a 5% spike in oil prices lifting the energy sector. The oil rally yesterday has been the combined effect of the cold weather returning and OPEC returning to talks on further production cuts. The recent drop in oil price has been the direct result of lower demands due to a warm winter. With the chill returning and lifting demand, it is certainly not strange to see oil prices getting back up to where it was before the drop early this month. Analyst continue to suggest that oil prices should stablise between $55 and $60 and frankly, that is my take on oil too as OPEC simply cannot stand watching oil prices go down below $50. Consumer confidence index released yesterday also edged up from 110.0 to 110.3, showing a marginal increase in consumer confidence in January. This is also the highest level in 5 years suggesting that consumers are driving the economy and should continue to do so in the coming months. Consumer spending makes up about two thirds of the US economy and that makes the consumer confidence index an important economic indicator. Well, so far, before the FOMC release today, everything looks rosy and pretty. The next few days will reveal the true effects of today’s FOMC release.

TECHNICAL ANALYSIS
Oil price formed and completed a cup and handle formation at last. I have suggested in my post on 23 Jan 07 that oil prices might not go straight up but would form a cup and handle formation before going up and yesterday, we witnessed that coming to be. We should see a testing of the $60 psychological resistance level soon and with oil prices showing a short term overbought condition, that resistance level might be a tough one to break. Both the Dow and Nasdaq continued to trade and close sideways yesterday as everyone awaits the FOMC release and its effects. Yes, we all know what the release will most probably going to be but we cannot predict its effects. I noticed the Nasdaq composite made a small but important move yesterday and that was, its closing above its 50 days moving average at last. Yesterday, I was concerned that the 50 days moving average is subtly turning into a resistance level instead of a support level as it has traded below it for 5 of the past 6 trading days. Today it seems like it no longer the case and with short term stochastics in oversold condition and turning upwards, there is strong potential energy in the Nasdaq composite to stage a rebound. Looks like the “Black & White Brothers” formation is working this time round. The Dow still looks healthy and ordinary as before, waiting to make yet another new step in its staircase formation to a new historical high.

Star Traders should continue to stay put today and start trading only from tomorrow onwards.

Jason Ng
Founder, Masters ‘O’ Equity
mastersoequity.com
“Your Personal Stock Option Mentor”