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Index Wrap

At what price does oil need to decline, for stocks to bid\?

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The major indices found a decline at the open, by late afternoon things were green, but by the close, the major indices were left mixed with sector action splattered in red and green.

Today's most notable "divergence" was oil declining despite The Energy Department saying its weekly crude oil statistics showed a draw in the nation's oil supplies. This "divergence" is a point of focus in tonight's index trader wrap.

Market Snapshot / Internals - 08/04/04 Close

When reviewing last night's pivot analysis correlations, the major indices stayed pretty much inside today's (Wednesday's) DAILY pivot correlations identified last night, and I can only surmise that the rather notable intra-day decline in the TRIN, combined with a blast of buying depicted by the TICK came in advance of Oil futures settlement. The buying seemed rather broad, lifting the A/D lines fractionally positive.

At this morning's open the TRIN spiked to as high as 2.60, which I thought a bit excessive.

It just so-happened that the swing trade bearish trade I had profiled in JP Morgan (NYSE:JPM) $37.18 +0.29% yesterday at $37.25, traded my bearish target of $36.70 on its way to a session low of $36.64 before the stock turned up to trade a session high of $37.37 at 03:00 PM EDT. I mention this only because I reviewed the KBW Bank Index (BKX.X) 95.17 +0.26% in some of yesterday's commentary.

Concerning to bulls is that while the NYSE 5-day NH/NL ratio improved, its 10-day NH/NL ratio continued lower.

For a third-straight session, new lows begin to build at the NASDAQ from Friday's improved 66 new lows, suggesting that the NASDAQ's 5-day NH/NL ratio will most likely show weakness in coming session as new highs have also been falling off since Monday's 65.

In essence.... little sign of bullish leadership, and bulls (as well as bears) are still looking for a bullish catalyst.

Pivot Analysis Matrix -

Both the Dow Industrials (INDU) 10,126.51 +0.06% and S&P 100 Index (OEX.X) 538.49 +0.10% pretty much pegged today's (Wednesday's) pivot analysis correlations highlighted last night. The S&P Banks Index (BIX.X) didn't quite get up to its DAILY R1 and WEEKLY R1 correlation, violated its DAILY S1/WEEKLY Pivot correlation, but found buyers just above its WEEKLY S1.

Now... when I look at the QQQ DAILY Pivots for tomorrow, it becomes rather evident that today's trade was HIGHLY computer driven, and suddenly, we now have correlative support at DAILY S1 and WEEKLY Pivots for the INDU, DIA, SPX, OEX. Meanwhile, the NDQ/QQQ and SOX.X and BIX.X find support correlations at DAILY S1 and WEEKLY S1.

The only DAILY correlations for resistance are NDX.X DAILY R1 and WEEKLY Pivot, then OEX DAILY R2 and WEEKLY R1.

OK..... now, all day I kept hearing CNBC's Bob Pisani reporting from the floor of the NYSE that bulls were skittish of stocks based on oil prices.

OK.... thanks Bob!

But that had me doing some investigative work.

Review those correlations above, as we're going to look at a bar chart of relative strength for the S&P 500 Index (SPX.X) versus the September Crude Oil futures (cl04u).

Remember! Relative strength measures are just that! We're measuring relative strength. Just because oil goes up or down 10% doesn't necessarily mean stocks will go up or down. This is why I want to you concentrate on the levels within the matrix. Oil prices could fall to $36 and SPX remain unchanged in price, but relative strength of SPX vs. Oil rise sharply.

We're looking for a SIGNAL from the equity market versus oil market, where if that signal is given, we want to know WHERE we're at.

Statement: IF relative strength of SPX vs. Crude futures is 26.85, THEN turn the computers on for buying.

S&P 500 vs. Sept. Crude Oil (Relative Strength) - Daily Intervals

I've made some very basic time-period references between on the relative strength chart of the SPX vs. Oil in respect to when the RS chart would have moved ABOVE the 21-day SMA. Imagine this as a TRIGGER to look for Oil WEAKNESS and SPX PRICE ADVANCE.

See where I'm getting a relative strength "trigger" at 26.85?

Now, I also make note that despite the rise in oil prices from their MAY relative highs of $40 to $44 (yesterday and briefly today), The SPX is still holding its May lows.

Hypothesis: Despite today's Energy Department statistics showing a decline in crude oil inventories, September Crude Oil futures (cl04u) fell from $43.62 to $42.80. I (Jeff Bailey) do not know "at what price" oil has to fall to find stocks making a meaningful move higher, but the RS chart may give the clue on RS reading above 26.85.

Trade thoughts: IF the RS chart of SPX vs. OIL gives upside trigger alert at 26.85, check where I am in relation to identified support/resistance correlations.

GO LONG: if RS ring the bell at 26.85, IF SPX is at a PIVOT ANALYSIS level of support. Thinking here is that computers may get turned on for buying. Downside risk would immediately be assessed to at least the DAILY S2s.

With my QCharts trading software, I think I can set a relative strength upside alert at 26.85, which should be triggered 30- minutes after the alert would have actually been generated (I'm 30-minutes delayed on futures).

In recent Index Trader Wraps, we've discussed the Securities Broker/Dealer Index (XBD.X) 118.60 +0.48% and the S&P Retail Index (RLX.X) 376.14 -0.72% as sectors that might reflect market sentiment near-term, where a good test for technical strength in the RLX.X would be the ability to move above its 200-day SMA (387.07).

Another test for technical strength discussed yesterday was for the very broad NYSE Composite ($NYA.X) 6,385.06 -0.27% to trade above 6,436.

U.S. Market Watch - 08/04/04 Close

Here's how things looked at the close (futures are not representative of Wednesday's trade).

Two points I find interesting, based on little news blurbs from analysts.

I can't find a news item, but a couple of sessions ago, a reporter mentioned that a major airline had implemented price hikes, but a day or two later, reversed that decision when other carriers didn't follow. Talk about a tough business right now. Try to raise fares to offset higher fuel costs and you COMPETITION won't follow you? Sounds like the competition is putting the pressure on you too.

The CBOE Internet Index (INX.X) was a sector loser today (outside of energy via decline in oil) where component IAC Inter Active (NASDAQ:IACI) $22.80 -15.64% got smacked lower.

One item of note was that an analyst being interviewed on CNBC thought the stock was pressured because the ECONOMY WAS SO STRONG, and that hotel chains were not having to DISCOUNT room rates. In essence, part of IACI's business model is that it benefits from higher hotel occupancy rates, when hotels are willing to discount rooms in order to achieve a level of revenue.

As they say, sometimes "good news" isn't necessarily good news.

Jeff Bailey

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