THE BOTTOM LINE -
Since Oil prices are pretty key to what stocks can manage, I include an analysis and look at some key charts for this sector below. I think oil has reached a peak for now and this should help out stocks.
I don't buy the $60 a barrel scenario based on what I see on the charts. $50 was the level I thought oil could get to. But, there is a tendency for pit traders (who are not the best prognosticators) to pick a higher number as further upside potential once an important level is reached. Since the talking heads on market cable know next to nothing themselves, hey why not! The traders must have an idea.
FRIDAY'S TRADING ACTIVITY -
THE NUMBERS -
The Nasdaq Composite (COMP) rallied 18 points (+1%) to 1,838 and gained 4.6% on a week over week basis. The Russell 2000 index (RUT) rallied nearly 2%, to 547.9. These market sectors were of course down the most from their highs of earlier this year.
REPORTS & ECONOMIC NEWS -
The Iraqi news was of a potential resolution to the standoff in Najaf. Investors found relief in the stories that militiamen loyal to rebel cleric Muqtada al-Sadr had removed their weapons from the revered Imam Ali Shrine in Najaf.
Volatility was in evidence on Friday also because of triple- witching activity relating to options, index options and index futures contracts all expiring.
U.S. Treasury Secretary John Snow said oil supplies have not been disrupted enough to justify releasing petroleum from the U.S. Strategic Petroleum Reserve. "I don't think we're there yet," he said in an interview on CNBC.
Snow said the Bush administration intends to keep adding oil to the reserve. With oil at such levels, investors remained as I said quite concerned about the effect of high energy prices on economic growth.
The Philly Federal Reserve Bank reported Friday that economists have lowered their growth forecasts for the U.S. economy for the rest of this year and the next. For 2004, the survey now sees growth at 4.3%, down from 4.6 percent in the last survey. Growth should average 3.8 percent annualized in the last half of the year, down from 4.1 percent earlier. Growth in 2005 was lowered to 3.7 percent from 3.9 percent.
The October contract,became the lead-month contract on Friday and finished at $46.72, down 92 cents for the day.
Militants loyal to Muqtada al-Sadr in Iraq were reported to have removed weapons from the Imam Ali mosque in Najaf, but remained in control of the site, according to the newswires.
Guess where prices got to on the charts - exactly to the top end of the price channel per the Sept and Oct contract charts below.
The touch to the top of the channel was accompanied by a very overbought extreme on the 14-day RSI.
The problem with believing that oil was going to go much higher was suggested by the next chart - that of the OIL stock Index, OIX, which made a minor top and then started trending lower, slipping under its 50-day moving average after a bearish price/RSI divergence. If oil prices were going to be sustained at higher levels the Oil Stock Index would have been going up along with it.
OTHER MARKETS -
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily chart:
The rally of this past week was substantial, better than I Anticipated with oil prices climbing like they were. Helping out this rally was the fact that traders didn't get immediately overly bullish, at least as suggested by my call/put model ran.
SPX resistance is at 1110, especially on a closing basis - an important level at both the prior upswing high and at the key 200-day moving average. Next resistance I figure at around 1120. Key support is at 1080. If this rally is going to mark much of a turnaround 1080-1085 should hold as support.
I mentioned last week a tendency for a good rebound after 2-3 touches to the lower envelope line, at least back to the 21-day average. That this average was exceeded suggested good upside momentum that should carry still further in the coming week. I figure SPX can make it to at least the 1110 area, maybe up toward 1120, which also looks to be a good place to take profits on calls.
S&P 100 Index (OEX) - Hourly chart:
I thought that the last decline to under 520 looked like an area to exit puts and do some call buying, looking for a move to at least 530 - too conservative of an estimate. OEX broke out above resistance implied by the top end of the hourly downtrend channel.
Next key resistance is in the 540 area per the level line and red (down) arrow on the chart. Above 540, I expect resistance at 550 at the previously broken up trendline - a prior support "becomes" possible new resistance. And, prior resistance (or a line of resistance), once penetrated, will tend to become new support on pullbacks: so key support now looks like 530.
Given the near-term overbought situation, I look for sideways to lower price action at some point, say by Tuesday. If there was pause/pullback and a less overbought condition if would then seem more likely for a further advance. This is just a tendency but you can see the frequency of pullbacks from overbought extremes when using the stochastic set at "length" 21 as on the chart above.
Dow 30 (INDU) - Daily chart:
The rally in the Dow (INDU) occurred from the low end of a well- defined price channel as in the chart below. Support is apparent in the 9800 area. Likely resistance comes in around 10200 at the prior (up) swing high, extending to around 10250 at the 200-day moving average. The top of the channel suggest even more significant resistance and possible selling pressure coming in the 10400 area.
As I said last week, the close above 10200 suggests possible ultimate potential to the top end of the downtrend channel on the daily chart, which is around 10400 - I would both exit calls in this area, if reached and look to buy some DJX puts.
PRICE/KEY INDICATORS SUMMARY - S&P:
The S&P (both SPX and OEX) as well as the Industrials (INDU) reached an oversold area and as pointed out in my last weekly commentary, the RSI oscillator had a bullish divergence - as seen in the higher low made by the RSI indicator contrary to price action (and noted on the RSI chart). [When the price pattern turns bullish or bearish and the indicators confirm, I note the occurrences with either up or down arrows under that part of the chart.]
NYSE Up Volume got back to its recent "baseline" and then turned up, suggesting a bottom, as did my "Sentiment" indicator. Note that the Call/Put reading is the one most likely to precede a rally. But all - price action and my key indicators - taken together suggested a high probability for the rally that followed this past week.
Nasdaq Composite (COMP) - Price/Key Indicators - Daily:
1840, at a prior closing low (support becomes resistance) is a key area in my mind that the Composite needs to clear next. Above that, 1892 (Columbus sailed the ocean blue!) is the prior high close and an even more key level. I have some doubt whether COMP can get above this area in the coming week - mostly I judge this by looking at key tech stocks. Not a lot of em are yet in gear on the upside.
Besides price considerations, always number 1 on my list, the same bullish price/RSI divergence seen in the S&P set up in the Nasdaq Composite - this from an area that looked like it could be the low end of a downtrend channel on a close-only ("line" chart) basis - see below:
The decline to a common "baseline" and then the turn up from there by the 10-day average of Nasdaq daily Advancing (Up) Volume was a bullish confirming indicator this past week. I had more on this aspect, this indicator, in my Trader's Corner article the other week.
This indicator and the other main ones I use got bullish in March and May. The up volume indicator is of use for indications of bottoming action only.
I'll note as before re the chart above, that I use the same Call to Put ratio for the Nasdaq as for the S&P and Dow Indices. When option traders do a lot of call buying relative to puts in equities options in general, or the reverse, the possible "overdone" aspect tends to hold true for both markets.
Nasdaq 100 (NDX) Index - Daily:
Bullish price action first occurred when the rally decisively penetrated the (downside) gap area. I thought that lows around 1315-1310 offered call buying potential and the upside exceeded my initial expectations for a rally back up to 1350-1355. Now what? Key resistance in the Nas 100 (NDX) is noted at the prior rally highs around 1410. I estimate near technical support to now be in the 1357-1360 area.
A close under 1357 would be a bearish note. The upper envelope line around 1430 currently is a next area where this index would be extended or overbought. 1357 is the level of the 21-day moving average currently - this average tends to alternate as a key support or resistance, as can be seen from prior price action.
Nasdaq 100 tracking Stock (QQQ) Daily:
Well, the Q's didn't make it back to 32, but did get to the support zone I highlighted in the chart. 34 looks to be pretty a pretty significant resistance overhang - there as a lot of buying in this area, at what was the low end of the March - July price range prior to the sharp early-August break. This then tends to be "breakeven" for many and is their first change to get out whole so to speak.
A close above 35 and the ability of the stock to hold this area on subsequent pullbacks is needed to suggest higher levels near- term such as back up the 35 area, or even 36.
Support is estimated around 33.50, then at 32-32.25.
I still favor shorting the stock on rallies that get to and falter at either the 35 or 36 areas.
Good Trading Success!