Option Investor
Index Wrap

Oil jitters keeps buyers at bay

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The major averages finished near their lows of the session where upbeat earnings from Apple Computer (NASDAQ:AAPL) $69.80 +6.63% couldn't offset the recent rise in crude oil prices, as traders' nerves were tested by short-term production snags in the North Sea, expectations of colder U.S. weather and concerns about further OPEC production cuts and the coming election in Iraq.

February Crude Oil futures (cl05g) settled higher by $1.67, or 3.60% at $48.04, it highest settlement since November 30.

Safe haven buying had today's yield curve flattening. Treasuries found a strong round of buying among the major maturities with the benchmark 10-year yield ($TNX.X) falling 4.9 basis points to 4.187%

The U.S. Dollar Index (dx00y) 82.44 +0.36% had the dollar recouping some of yesterday's steep declines after wider-than- expected trade gap figures sent the dollar tumbling on Wednesday.

February Crude Oil Futures (cl05g) Chart - Daily Intervals

February Crude looks destined for the $49.29-$50.27 area, and for that to take place, traders would be well advised to set a near- term upside alert at this contract's WEEKLY R1 of $48.55.

It is still a bit perplexing to this analyst as to why the Oil Index (OIX.X) 399.61 +0.50% lags the commodity, and why some of the producers have been cutting their cap-ex budgets with oil prices still above $40.00.

One explanation may be the thoughts of Andrew Lebow, a senior vice-president at Man Financial Inc., who recently told the Canadian Press that he thought there is still somewhere between $10 and $15 a barrel worth of "fear premium" in the oil commodity market, which should be removed by the end of the month, following the Iraq election and the next meeting of OPEC.

The OIX.X remains an index I feel traders and investors should bee keeping an eye on, where similar lag in this equity index to the commodity itself, is as suspicious as the Gold Bugs Index ($HUI.X) showed versus gold prices in November. When gold stocks tumbled, gold followed not long after.

With this exercise, I'm looking for the OIX.X to "tell us" if the rise in oil prices is going to be sustainable (Mr. Lebow might be doing this too), or is oil's rise simply being caused by trader's looking to hedge some risk into Iraq's elections.

Earlier this month I showed a chart of the OIX.X with just one retracement, where we discussed the possibility that a head and shoulder top could be forming with a neckline at 385.50.

Tonight, I'm going to show that same chart, but I'm also adding a BLUE retracement, which is anchored at an inflection low found in August (to tie into above futures) and then an inflection high found in October (to tie into above futures), which the OIX.X then exceeded in early December. I am also showing a downward trend on the OIX, from its October relative high (to tie to above futures) and a December relative high (to tie to above futures).

Oil Index (OIX.X) Chart - Daily Intervals

The OIX.X appears to be lagging the commodity itself, and this is a point of suspicion to me (Jeff Bailey) after the OIX.X exceeded the October highs for oil futures in late November, when the OIX.X went on to trade 417.

Since January 1, there has been what I would consider to be a "general distaste for equities" and that by itself may explain why the OIX.X appears to be lagging oil futures (the commodity).

However, the OIX.X's "lag" could also be sign that broader MARKET participants think oil's recent rise is only temporary, and is a defensive play into the Iraq elections.

My thoughts are this. If the OIX.X get above 405, then not only could we see a short-squeeze in some oil-related stocks as upside risk is immediately assessed to at least 411, but could also be a beginning to confirm thought that oil itself, did NOT trade all- time highs in October of last year.

U.S. Market Watch - 01/13/05 Close

Outside of the Dow Industrials (INDU) 10,506 -1.05%, which never did see green today (for reasons possibly revealed last night) things didn't look as bearish at 03:00 PM as they do by the close.

Bids (buyers) simply evaporated, and I mean evaporated at 03:00 PM EST when the bond market closed. Look at the Russell 2000 Index ($RUT.X) 610.13 -0.49%. It traded its session high at 02:30 PM EST, had "eased back" to 614.00 at 03:00 PM EST, then simply fell apart. Any encouragement for a bull would be that the RUT.X didn't violate yesterday's low of 604.64. I will note here that 606.41, which was traded to the downside yesterday, was April's high.

Market Snapshot / Internals -

I didn't like the flattening curve today. Fellow analyst Jane Fox had noted earlier in the day that while stocks were trying to hold near unchanged, the rising TRIN indications had her thinking something was up, or eventually down as the case would be.

Filed away in my memory bank today is that the 5-day NH/NL ratios for both the NYSE and NASDAQ show improvement. For the NYSE, today is the second day. For the NASDAQ, it is the first. No reason for a bull to act on this, just file it away, there's probably plenty of time to initiate a new bullish trade.

Think of these VERY EARLY SIGNS of some type of resumption of short-term bullish leadership in relation to the prior discussion above regarding OIL.

I don't know if you may have caught an interview late this afternoon on CNBC, but Maria Bartiromo was interviewing Commerce Bancorp's Vernon Hill. The banks/financials were lagging again today and when asked about higher rates of interest, Mr. Hill quickly brought in the yield curve. While still steep, Mr. Hill immediately noted that he would prefer the yield curve to not be as flat as it has become lately, as that can squeeze margins. While Mr. Hill said strong business trends can offset the flattening of the yield curve, the best of both worlds is strong business trends and steepening of the curve.

Pivot Matrix -

I'll note tomorrow's DAILY S2 for the DIA as being $104.00, then remember that suspicious option trade noted in last night's wrap.

To get there, I'm thinking correlative SPX S1 and DAILY S1 would need to be violated to the downside.

To do that, then perhaps further flattening of the curve, with the 10-year yield ($TNX.X) falling below its correlative DAILY S1 and WEEKLY Pivot.

For strength? How about the QQQQ/NDX? The QQQQ gets a "tweezer bottom" with today's low matching that of yesterday.

The "sucker move" a bear need to be careful of is a break below $38.00, steepening curve, and TRIN moving LOWER, with first sign of the "sucker move" being a sudden snap back above the tentative (dashed red) MONTHLY S2/DAILY Pivot correlations.

Jeff Bailey

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