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Oil closes at record highs

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Crude oil futures closed above $42 per barrel for the first time ever as terrorist attacks in Saudi Arabia provided the fear catalyst for the move higher.

By the close, the major equity indices shrugged off the jump higher in oil prices to close mixed, as economic data released showed construction spending and May manufacturing data stronger than economists' had forecasted.

Market Snapshot / Internals - 06/01/04 Close

A late spat of buying in the final half-hour of trade left the major indices relatively unchanged as stronger than expected economic data seemed to help offset this weekend's terrorist strikes in Saudi Arabia.

Pivot Analysis Matrix -

Multiple correlations of support show up in tomorrow's pivot matrix, but I think traders need to keep a pretty close eye on the benchmark 10-year Treasury Yield ($TNX.X) once again at the 4.75% yield level. Treasuries actually gapped lower in price, yield higher, to start the session, and that had to be a response to the jump in crude oil prices in the early morning trade.

The higher trade in Treasury yield did see the S&P Banks Index (BIX.X) trade its WEEKLY Pivot, and if anything, may have stepped up some profit taking in the banks/financials after a strong move higher the past two weeks. The tests of the WEEKLY Pivots for the BIX.X and OEX.X are nothing too concerning at this point, but notable considering move higher in the 10-year YIELD, which started the week out BELOW its WEEKLY Pivot.

CBOE Internet Index (INX.X) - Daily Intervals

While the CBOE Internet Index (INX.X) 191.70 +1.68% gained a seemingly modest 3 points today, when it turned green in the final hour of trade, this seemed to be the sector that sparked, or lead the late session recovery. Despite a downgrade of eBay Inc. (NASDAQ:EBAY) $86.69 +1.0% by AmTech (stock reached their $86 objective, trading at highest forward multiple since July 2002, typical weak seasonality from June-Sept, lacks near-term catalysts) EBAY reversed earlier losses to close at an all-time high and gained for an incredible 10th-straight session.

Semiconductor Index (SOX.X) - Daily Intervals

The SOX.X was little moved by today's SIA report (see 01:00 PM intraday) and Intel (NASDAQ:INTC) $28.33 -0.77% traded heavy ahead of Thursday's mid-quarter update, which will take place after the close.

I still get the feeling that there is one more shoe to drop that would have the SOX.X reaching its h/s top price objective of 412 (02/29/04 Ask the Analyst), but to get there, I'd have to observe weakness back below the current MONTHLY Pivot of 470. While Dorsey/Wright and Associates' Semiconductor Bullish % (BPSEMI) reversed up to "bull alert" status last week at 24% and was unchanged today at 26.28%, I could envision a deeply oversold bullish % reading at 10%, which the BPSEMI seems to like to do on a historical basis, where that may well line up for the eventual bottom back near the October 2003 relative low.

The shoe that I see dropping at this point would have to be negative market psychology toward oil prices, and geopolitical risk leading up to and surrounding the June 30 deadline for turning over Iraq to its newly created government. This weekend's terrorist activity in Saudi Arabia seems to have terrorists focusing on trying to disrupt the oil markets, which could damage global economies.

NASDAQ-100 Tracker (QQQ) - Daily Intervals

Volume levels in the QQQ are extremely light and from what I can see on an intra-day basis, this lack of volume seems to have the QQQ being easily pushed around on an intra-day basis. Today's low came right at Monday's DAILY S2 ($36.11) and on light intra- day volume from the level, the QQQ easily reclaimed Friday's close. QQQ provides strength for the SOX.X at this point (QQQ relative strength vs. SOX.X) and I think without upbeat response from market to Intel's mid-quarter update, QQQ is going to have tough time getting much above $37.00.

On SOX.X weakness below 475, I'd be more tempted short for the Semiconductor HOLDRs (AMEX:SMH) that I would be QQQ.

S&P 500 Index (SPX.X) Chart - Daily Intervals

If I was caught off guard by anything today, I'd have to say it was the morning gap lower in Treasury prices (gap higher in YIELD), which was either a response to this weekend's events in Saudi Arabia and oil prices setting new highs, or comments out of China that it didn't see it necessary to raise its interest rates as prices for steel and aluminum had abated. I think today's Treasury action was a concern toward inflation, and maybe slanted toward China's comments, which to me sound a bit complacent toward global inflation. Dorsey/Wright and Associates' point and figure chart of July Aluminum futures (ALN4) $82.50 recently traded a double top buy signal at $78.50 and are currently building a bullish vertical count that hints at $92.75, which would be well above the recent contract highs of $88.50 found April.

Regardless, Treasury yields backed up and brought some weakness to financials and should Treasuries unwind recent gains with the 10-year YIELD ($TNX.X) rising much above 4.75%, then I would think financials come under selling pressure and recent profits get unwound quicker than what a normal spat of profit taking would find. If so, then the SPX once again vulnerable back to 1,090, with stiff resistance just above at our downward trend.

I did think today's jump in crude oil with the July Light, Sweet Crude Futures (cl04n) $42.33 +6.14% setting new contract highs and closing there, is testament to current market sentiment toward potential terrorism. While Saudi Arabia assured investors that oil flows are not at risk, oil futures aren't to sure.

One thing I'd want to note as it relates to oil's price movement, is that while not an exact match, the recent trade for weaker oil brought dollar weakness, as if there was a hedge between the two. Should oil continue to rise and we see dollar strength, then we should note that the U.S. Dollar Index (dx00y) 88.81 made its recent high from 05/12-05/14, where the multi-national heavy Dow Industrials (INDU) 10,202.65 +0.13% made its recent relative low on 05/13/04 and has traded inverse the dollar.

We've also noted how the AMEX Gold Bugs Index ($HUI.X) 196.25 -1.84%, which ended up as today's equity sector loser tends to trade inverse the dollar.

Today, only the Dow Industrials (INDU) traded lower to test its MONTHLY Pivot.

Dow Industrials (INDU) Chart - Daily Intervals

I was a bit surprised that oil prices jumped like they did today, and while I don't have the time to show the July Light, Sweet Crude Oil futures (cl04n) contract, should it stay above the recent contract highs of $41.71, I'm thinking the INDU is going to be hard pressed to make a break much above 10,300.

I would currently view near-term support for the INDU at 10,100 and the WEEKLY Pivot, but should I see a break below that level in what has been a weaker INDU relative to the other major indices, then I would have to think oil prices are moving higher, as well as the dollar.

It just seems to me that today's sharp rise in oil, despite assurances from Saudi Arabia that oil supplies will not be disrupted, found way too sharp a move higher in oil, as if market participants in the oil markets hadn't fully factored in the POTENTIAL of terrorist activity this soon.

Jeff Bailey

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