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Index Wrap

Oil happens!

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The major indices gushed higher to close at their highs of the session, where a one-day reversal in oil had equity bulls hopeful that the torrid rise in energy prices may be nearing an end.

Despite a sixth straight week of declines in distillate inventories, from which heating oil is refined, December Crude Oil futures (cl04z) $52.46 -4.9% fell a sharp $2.71 and continue to edge lower in Thursday's trade at $52.15.

Late last night I was updating our economic report table and had made the following notes.

Consumer confidence fell to 92.8 in October, and very close to its April reading of 93.00.

On April 30, the S&P 500 Index (SPX.X) closed at 1,107, not too different from Tuesday's close of 1,111.

The DIFFERENCE that stood out was oil, which isn't a surprise considering the Conference Board said "energy prices" was the main contributor to weakening consumer confidence. Perhaps investor confidence as well.

Economic Table - Last update 10/16/04 Close

Today, the "unexpected" may have happened. Crude oil and heating oil futures did bid higher just after this morning's 10:30 AM EDT release of weekly energy inventory figures, but sellers showed up in force at about 10:50 AM EDT.

I heard/read at least 10 reasons for why oil reversed course.

One reason cited was that while distillate inventories fell (-2.4 million barrels versus -750 barrels), it was the much larger than expected rise in oil inventories (+4.0 million barrels versus estimates for 800K).

Another reason mentioned, which is something we had discussed recently is that refiners just hadn't "turned on the spigots" to start refining heating oil at these higher price levels, afraid of getting stuck with inventory should a mild winter be found in the northeast. Again, it is my understanding that refiners can refine heating oil as if it were candy, as there isn't a major refining effort needed.

U.S. Market Watch - 10/27/04 Close

The AMEX Composite (XAX.X) 1,314.84 +0.24% managed to squeak out a new 52-week closing high. So did the CONSUMER SENSITIVE retailers in the S&P Retail Index (RLX.X) 427.16 +2.18% and the once-thought "fuel sensitive" Dow Transports (TRAN) 3,475. Tonight I posted the 1-year (last 52-weeks) highs and lows along with percentage changes.

Good Gravy! Heating oil up 106% and Oil up 98%. One has to wonder just where the major indices might be if energy prices haven't risen like they have.

Market Snapshot / Internals - 10/27/04 Close

Volumes remain brisk at both the NYSE and NASDAQ, where renewed interest among investors in October had the NASDAQ turning more than 2 billion shares for the second time in 5 sessions. Shorter-term bullish leadership is renewed at both the NYSE and NASDAQ where 5-day ratios see upside reversals, with NASDAQ just reversing up at 60.00% today after the NYSE 5-day NH/NL ratio reversed up yesterday.

We've been looking at December Crude Oil futures (cl04z) on a 30- minute interval bar chart.

Tonight I want to quickly run through a 50-cent box size chart of www.stockchart.com's Continuous Oil Chart ($WTIC). While most charts of crude oil futures are plotted on a 25-cent box size, I'm charting on 50-cent so we get a bigger picture, and remove some of the noise/volatility from oil's trade.

Oil - Light Crude - Continuous Contract ($WTIC) - $0.50 box

First sign of weakness would be a double bottom sell signal at $51.50 (O going below a prior column of O). Now, see where I've colored it yellow? By gosh, that would be the same yellow zone I've had marked on our 30-minute bar chart of the December Crude Oil futures (cl04z). As many times as a housing bubble has been called, so has a bubble in oil. Before the bubble can "pop," there's still some selling to be done, but for equity bulls, there may be some sign of weakening.

Now, see the vertical PINK lines? I've marked one partial column of O (supply) with the "High Pole Warning," which is a point and figure pattern that can signal a reversal in the making.

Oil has a lot of BULLISH momentum behind it, and with a commodity, that momentum can be long-lasting. However, see how oil did fall back to a prior "buy signal" that was created at $41.00 back in late August? That red 9 at $41.50 is early September.

Everyone, even an oil bull, is afraid of buying the top. If oil can break below $51.00, I think there's a pretty good chance it unwind further to at least $49.50. See what happened at $49.50 on the way to the recent high? That spread triple top buy signal at $49.50 had every short running for cover. Those that didn't will most likely be eager buyers on the re-test.

In last night's Index Trader Wrap, I mentioned the possibility that a reversal in oil, however unlikely, could see the S&P 500 Index (SPX.X) trade back near 1,125.

OK, tonight I'm going to lay the groundwork for the possibility that a further decline in oil, could see the NASDAQ-100 trade 1,500. But the KEY is OIL, and market psychology toward Tuesday's election.

Pivot Matrix -

The 10-year Yield ($TNX.X) was DOWN more than 2 basis points earlier in the session, then reversed higher as oil reversed. See that correlative 41.32, or 4.132% at DAILY R1 and MONTHLY Pivot of 41.27, or 4.127%. I (Jeff Bailey) think there's still going to be some hesitancy among market participants, and they won't be to willing to sell the "safety" of the 10-year above that level.

My thought is... there's only two things that will have the 10- year yield ($TNX.X) moving much above 4.132% over the next week. One is that oil sees continued decline (like today), coupled with a market psychology that doesn't "fear" any potential terrorist attacks ahead of Tuesday's election.

Months ago the Department of Homeland Security alerted us that it had information that terrorists may be targeting some financial buildings in order to try and disrupt the U.S. presidential elections.

I (Jeff Bailey) don't believe there will be a terrorist strike between now and Tuesday, but I'm not the MARKET. The MARKET may not believe it either. If the MARKET wants to get more aggressive on the "buy side" for equities, then it should sell the 10-year YIELD above 4.132% is my thinking, and use a lower oil price as the catalyst.

I'm kind of excited tonight. Remember that "fitted" retracement of the e-Mini NASDAQ-100 futures (nq04z) I've shown in the past? The one with some yellow zones?

Check this out. Tonight, oil closes right near $52.00 as the e- mini NASDAQ-100 futures settle at 1,479.50. On October 6, the e- mini NASDAQ-100 futures settled right at these levels. Oil did too!

Quick! Go back and look at your pivot matrix for the cash NDX.X and QQQ.

e-Mini NASDAQ-100 Futures - Daily Intervals

I make some notes as to how we're once again at a "zone" of resistance. Remember, this 1,478.83-1,485.81 yellow zone is a RESULT of fitting.

I asked myself "why" futures traders wouldn't push the e-min futures above 1,485.81 back on October 6. I ask myself that today to.

It could have been due to something going wrong with the semiconductors. It could have been oil too.

December Crude Oil futures (cl04z) - 30-minute interval

On October 7, December Oil futures jumped to new contract highs of $52.00 from its then WEEKLY R2 of $50.99 (say $51 and tie with PnF chart). See how oil hasn't wanted to go back below that $51.00 level, which we've marked with our yellow zone?

Now, I said above that if oil will give that double bottom sell signal at $51.50 and pick up downside momentum near-term below $51.00, it should fall to at least $49.00.

On the above chart, I see where $49.05 (say $49.00) was the WEEKLY Pivot earlier this month. One thing an equity trader might look to do is on continued weakness in oil, is play the "beta trade" or the high tech trade from the bullish side.

I think a bull could do that, then protect with a rather tight stop below the current WEEKLY Pivots.

The catalysts for gain is further decline in oil and we should have a decent idea of a near-term downside target.

The 10-year YIELD ($TNX.X) will give an indication of how AGGRESSIVE the MARKET wants to be. If Treasuries are the "safe haven" where money has been flowing into since May, when the 10- year YIELD was up at 48.00 or 4.8%, then the more aggressive the market wants to get with equities, it will get LESS DEFENSIVE and sell Treasuries faster than a politician will sell out to the highest bidding lobbyist after Tuesday's election!

I'm kidding of course. Politicians do what is best for the nation.

Jeff Bailey

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