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Shifting sentiment with oil

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If I could just figure out for certain which way oil prices were headed, I'd have a much more comfortable feel for what to try and expect in coming sessions.

Stocks seesawed with oil in Tuesday's trade, where the major equity indices and oil finished relatively unchanged ahead of tomorrow morning's weekly crude, distillate, and unleaded gas inventory report from the EIA.

Oil - Continuous Contract ($WTIC) Chart - $0.25 box

After giving a reversing higher point and figure buy signal on Friday at $47.50, the conventional $0.25-box chart of $WTIC has oil extending gains without so much as a 3-box reversal, and the bullish vertical count growing to $60.00. Ugh! If oil is headed to $60, that can't be good for equity market psychology, and with each passing day, traders and investors certainly get the feel that equity traders remain focused on what oil is doing at any given moment.

Since the point-and-figure-tologist (one who uses point and figure charts) would chart X's up to $50.25 for today's trade and stop, as that's where the current column of X (demand) builds to. However, I also like to look as see where oil settled ($48.94) as well as some further selling into tomorrow's session ($48.73) to try and get a feel for things toward the close.

I'd have to say that oil traders don't seem to be showing their hand, as oil settled almost smack-dab between Friday's buy signal and today's high.

Meanwhile, the S&P 500 Index (SPX.X) 1,176.94 -0.02% would have finished today's session almost smack-dab in the middle of for Friday's opening tick and yesterday morning's low.

But I'm going to go into tomorrow trade with the thought that by the close, oil will have settled below today's $48.94 settlement, as January Heating Oil (ho05f) $1.4579 matched yesterday's high, but did NOT exceed it like we saw in the January Crude Oil (cl05f) futures contract.

January Crude Oil futures (cl05f) Chart - 30-min intervals

The O/H/L/T in the above chart is Wednesday's (tomorrow's) electronic session already underway. I'm still keeping my "yellow" zone of resistance on the January contract, which ties to the point and figure chart. If that observation of "heating oil" being a leading indicator for Crude Oil (see this weekend's Ask the Analyst) column is the telling DIVERGENCE traders are keying off of, then I'll have a bearish bias for oil below WEEKLY R1 at this point, but will have to respect that rising 50-pd SMA and DAILY Pivot as the near-term support on the above chart. See how the 50-pd SMA seemed to be moving average resistance since late October until that "pop" higher from Friday?

Resistance broken can become support.

Market Snapshot / Internals - 11/23/04 Close

Oil jumped higher at around 11:00 AM EST and I still think traders can see the impact that type of "pop" higher in oil has on things. The rather robust expansion of new highs at the NYSE is most likely attributed to "energy stocks" listed on the big board. Then as oil retreats toward its daily settlement, look at internals building to their best levels of the session on the advance decline lines.

U.S. Market Watch - 11/23/04 Close

Look at the Market Volatility Index (VIX.X) 12.67 -2.31%! Early this morning, the VIX.X plunged to a new all-time low of 12.57. At today's close, most active SPX options were the Dec. 1,175 puts (SPT-XO) with volume of 8,101 and OI of 54,588. This contract finished at $11.80 with average OHLC of $12.85. The Dec. 1,200 calls (SZP-LT) were the second-most active at 6,530 contracts with OI of 56,318. This contract finished at $5.40 with average OHLC of $5.05.

With the VIX.X falling, I have to think the bulk of trade was put seller and call buyer.

I should note that its is NOT the volume in the above mentioned put/calls that has my interest. Its the VIX.X at an all-time low that has me trying to figure out just what might be taking place, where as the VIX.X falls and the 1,175 puts are most active, why would anyone be willing to sell those puts with volatility and premiums so low?

The pivot matrix might provide the answer.

Pivot Matrix -

If a trader is selling 1,175 for an average price of $12.85, what that trader has to be thinking is that the SPX will not close below 1,175 - 12.85 = 1,162.15. This 1,162.15 calculation would be pretty darned close to this WEEK's S1. Is the MARKET, or a TRADER so confident in a lower oil price reaction that they'd be selling Dec. 1,175 puts against that level? Then buying the out- the-money 1,200 calls in excess of WEEKLY R2?

They might be. See today's low in the SPX comes right at/near the MONTHLY R2. Also note tomorrow's SPX DAILY S1 and MONTHLY R2 correlation. Let's consider that some important support with weekly energy inventories due out tomorrow morning at 10:30 AM EST.

Here's a 30-minute interval chart of the SPX with our WEEKLY and MONTHLY Pivot retracement overlaid.

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

As I look at the above SPX chart on 30-minute interval, something additional hits me. See that little "double-top" I point to at SPX 1,080? That's this morning's opening tick highs and this afternoon's highs. That looks almost IDENTICAL to the little double-top in Heating Oil futures from yesterday's high and today's high.

My thinking here is that EQUITY bulls are simply waiting for the reaction to tomorrow's data, but buyers seem more eager than sellers.

I also point down to the WEEKLY S2, where earlier this month, we can see how the SPX danced along this level before advancing to the recent highs of 1,188.

While it is my assumption that today's action in the Dec. 1,175 puts was the opening up of "naked puts" and selling of 1,175 for approximately $12.85 throughout the session, I will want to check this first thing tomorrow morning against newly tabulated open interest. It could be an "old bear" selling those puts and closing out after seeing 1,188.

Jeff Bailey

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