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A bit unnerving

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It may have been a bit unnerving to broader market equity bulls to see January Crude Oil futures (cl05f) $44.19 +5.7% jump more than $2.00, but it had to be equally unnerving for broader market bears to see stocks trade mixed to higher.

Could it be that the market doesn't care about oil prices anymore?

I doubt it, but can only think that the market doesn't get overly concerned unless oil can settle above $46.36.

Here's a quick look at today's energy futures action. Heating Oil lead the percentage gains, where the EIA said its statistics showed heating oil inventories unchanged, where analysts were actually looking for a 1.0 million barrel build.

U.S. Market Watch - Energy futures (Jan, Feb, March)

No build in heating oil, and cold weather along the east coast was today's catalyst for a move higher in heating oil, crude oil and unleaded gasoline. I don't have much of a background in meteorology (the study of weather), but I have made note that January heating oil settled HIGHER (green arrow) than February heating oil (pink arrow), which settled HIGHER than March heating oil (red arrow). Hmmm.... that's not all that unusual as warmer weather usually presents itself in the spring.

You can probably see the same "seasonality" in natural gas prices with February trading $7.33 and March a little lower at $7.26.

What keeps the March Crude Oil futures (cl05h) $44.90 just higher than February, is probably the prices for Unleaded Gasoline (Jan, Feb, March).

If I (Jeff Bailey) were to observe future month Unleaded Gasoline prices below the current month, I'd be telling you that today's bounce in oil was "just a bounce, don't worry about it," as the market looks toward spring.

But heating oil, and CURRENT weather temperatures and inventories still seem to be the main catalyst for how oil trades, or unleaded gasoline for that matter. Gasoline prices rose "in sympathy," as they should (derived from crude oil) despite the EIA saying unleaded gasoline inventories rose by 1.5 million barrels.

Note to refiners.... produce a little more heating oil, cut back on your gasoline refining. Get your mixtures "just right."

Now, I can't say with any certainty that stock investors "didn't care" about oil prices today, but I think the market can probably use some of the same reason discussed above, and an understanding of where oil has been the past couple of months, to perhaps think its a little early to be "panicking" for today's gains.

Let's quickly review the daily interval chart of January Crude Oil futures (cl05f) and see if you might not agree with $46.36 as a level of trade where the equity markets do start to care about oil's price.

January Crude Oil futures (cl05f) - Daily Intervals

After completing last night's Index Trader Wrap, I posted some thoughts/observations regarding heating oil hinting that prices might see a near-term rebound. I will admit that I didn't think oil would jump above $43.53 today, and the overlapping resistance from my "fitted 38.2%" (pink) retracement, and the conventional (blue) retracement.

But it might just be the case that the MARKET has picked up on how after trading $55.30, crude oil FELL lower by 4 blue levels ($52.54, $49.78, $48.07 and $46.36) to then bounce up 2 levels (48.07 and $49.78) but NEVER find a daily settlement ABOVE $49.78 before sellers drove oil back LOWER by 4 levels.

I've said before that commodity traders are very supply/demand chart driven, and boy do they trade levels. They look for patterns, and they look for SIMILARITY and DIVERGENCE to the past before they decide to change their trading posture (bullish or bearish).

In my opinion, every oil BULL above $46.36 is looking for a rally to sell into (that's a good test for renewed strength), while after seeing 4 levels of LOWER trade, BEARS may have locked in some gains today.

Now, look to the far left of the chart where I "red circled" and labeled the $46.36 level with "Alert!" That settlement above $46.36 may well have been the "alert" to further strength in oil, especially as oil was making new contract highs and overhead supply was limited!

For me, and perhaps other market participants, $46.36 is "the level" near-term that broader market equity bulls might care about the most.

U.S. Market Watch - 12/15/04 Close

Strong earnings from Lennar (NYSE:LEN) $56.35 +10.85% and lower 10 and 30-year Treasury yields, which should have mortgage rates holding at/near historically low levels had the Dow Jones Home Construction Index (DJUSHB) 807.15 +5.43% surging once again.

I was looking at some of these homebuilders and the short interest/days to cover on them. Suffice it to say, bears are getting their heads handed to them in recent sessions, and bulls have been more than eager to swing the axe.

I couldn't uncover any news as to the Biotechnology Index (BTK.X) 537.39 -1.21% slid 6.6 points after challenging the neckline (545) of that reverse head and shoulder pattern. The Biotech HOLDRs (AMEX:BBH) 145.65 -0.65%, which have been bumping against $147.50 for two weeks now, show a "Max Pain" theory value of $140 for December ($5 increments), while the BTK.X's "Max Pain" theory value is 520 (20-point increments) and today's losses among the components look rather evenly spread.

When looking at a bar chart of Network Appliances (NASDAQ:NTAP) $34.64 +4.62%, a component of the Disk Drive Index (DDX.X) 121.14 +1.78%, it looks like some speculative bears decided to give up as NTAP breaks out of a 8-day pennant. A point and figure chartist would associate the bar chart with one of the bullish triangle-looking patterns.

SanDisk (NASDAQ:SNDK) $23.41 +2.27% got a little pop from its December "Max Pain" theory of $22.50, where a better-than consensus earnings report from BestBuy (NYSE:BBY) $58.86 +5.03% and some upbeat forward-looking comments couldn't have hurt.

The Securities Broker Dealer Index (XBD.X) 152.64 +0.37% scratched out what I would consider to be a fractional gain. Lehman Bros. (NYSE:LEH) $87.90 +2.62% closes in on its all-time high found in March at $89.72 after blowing away consensus estimates. Legg Mason (NYSE:LM) $70.30 -3.36% provided the drag after saying in plans to offer 4 million shares in a secondary public offering. Goldman Sachs (NYSE:GS) $109.25 -0.57% edged down 63 cents ahead of tomorrow mornings quarterly earnings report. Consensus has "Goldy" earning $2.30 per share.

The bond trade in Treasuries has me, and probably half of Wall Street perplexed. I can't figure it out.

Maybe Merrill has the right call. "One and done," with yesterday's 25 basis point rate hike by the FOMC being the last one for a couple of meetings.

The trade in our "Junk Bond" Pacholder High Yield (AMEX:PHF) $10.03 +0.4% continues to suggest a low interest rate environment, with steady economic growth.

Here's an updated chart of PHF with my conventional (blue) and bullish "fitted 38.25" retracement. In May, I thought all the screaming about inflation provided a buying opportunity for "junk bonds," but we had to believe in a strong/strengthening economy and little inflation. However, just recently, on 11/24/04, I thought PHF bulls should sell some of their holdings (1/4 or 1/2 positions) when PHF pierced the $10.10 level.

Pacholder High Yield (PHF) - Daily Intervals

As I review my thoughts regarding the decision to advise investors to take some profits, I was really thinking we would see some selling in the 10-year Treasury and 30-year Treasury, where their YIELDS would move higher, perhaps make the dividend yield of the PHF becoming less attractive and subject to some profit taking, back lower to $9.66, where I could once again listen for rumblings of "inflation, slowing economy" as a re- entry point. This may still happen, but buyers now look to have been eager to buy a 9.2% dividend yield after the pullback to $9.78 and that "zone of support."

Can "junk bonds" get squeezed as a "head/shoulder top" sees the right shoulder grow into the ear? I guess that depends if you're short, have to cough up $0.075 dividend per month, and aren't certain what stage of an economic recovery you might be in.

Considering "junk bonds" are the closest member of the bond market to equities, I don't see why junk can't get squeezed just like a stock.

S&P 100 Index Chart - Daily Intervals

The S&P 100 Index (OEX.X) 573.45 +0.17% did close at a new 52- week high, by 0.01 point! In an evening Market Monitor post on 12/01/04 I was feeling a little bullish as we turned the calendar to December. Other than DAILY R1s and R2s for tomorrow, and today's rebound in oil prices, there's little technical resistance other than a bullish resistance trend from the prior higher highs to keep the OEX in check.

Drake the dog better quit sleeping under my chair, unless he doesn't mind the thought of me falling on top of him.

Pivot Matrix -

The Dow Industrials (INDU) 10,691 +0.14% closed right on its WEEKLY R2, and with today's intra-day observation that one of its components Exxon/Mobil (NYSE:XOM) $50.51 -0.29% wasn't moving in the direction of oil prices, but seemed to "pinned" near its December "Max Pain" theory of $50.00, I've got to think quarterly expiration has something to do with this. Mind you, I don't go around checking every stock's December "Max Pain" and thinking up theories that a stock does what it does based on option expiration, but XOM's trade, relative to what oil prices were doing today, has me somewhat suspicious.

Keep an eye on XOM. Nasty looking head/shoulder top pattern developing here. But, I've seen enough of these fail in recent weeks to be leery. Still, this is oil, and I'm not all that convinced that January Crude Oil futures (cl05f) can get a settlement back above $46.36.

With the NASDAQ-100 Index (NDX.X) getting ready to reshuffle into Friday's close, perhaps the lack of correlations in the pivot matrix has something to do with that also. Tough trade for the QQQQ next couple of days in my opinion.

Market Snapshot / Internals - 12/15/04 Close

Brisk volume by the close, which isn't all that unusual, especially as we near the quarterly expiration. Today's advance/decline lines reflects the "squeeze" or "Python squeezes bear" I sensed, based on observation Monday evening, and NH/NL indications on the shorter-term 5-day basis begin to turn up above their 10-day indications.

Jeff Bailey

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