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Market Wrap

Profit taking finds gold under $700; oil back under $70

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Commodity prices retreated Monday with the StreetTracks Gold Trust (NYSE:GLD) $67.41 falling 5.22%, while June Gold (gc06m) settled down $26.80/oz, or -3.76% at $685.00 on the COMEX.

Trader's cited profit taking in the precious metals complex for much of today's decline, but China's central bank setting a key trading benchmark for the yuan under the psychologically important level of 8.0 to the dollar for the first time, may be a signal out of Beijing that the Chinese government may allow its currency to appreciate more rapidly versus the dollar.

June Crude Oil (cl06m) settled down $2.63, or -3.65% at $69.41, its lowest settlement in more than a month.

Saudi Arabia's oil minister Ali Naimi told reporters that "there is no lack of capacity right now." When asked about the impact of high prices on global demand, Naimi said: "In general, when prices are high, people check their pockets and when they are lower, they open them."

Bantering between the United States and Venezuela did little to stem oil's decline prior to settlement.

Late in the afternoon the Associated Press reported that a State Department official said the U.S. is set to impose a ban on arms sales to Venezuela because of what it claims is a lack of support by President Hugo Chavez's leftist government for counter terrorism efforts.

The official said Venezuela has been providing a safe haven for the two main leftist guerrilla groups in Colombia. The official spoke only on the condition of anonymity because the arms sale ban hadn't yet been announced.

Moments later, Dow Jones reported that Venezuelan President Hugo Chavez brushed aside the U.S.'s suspension of arms sales to his country, saying "this doesn't matter to us at all."

"It's the empire and it has a great capacity to do harm to the countries of the world," said Chavez, referring to the U.S. as "an irrational empire."

U.S. Market Watch - 5/15/06 Close

The U.S. Dollar Index (dx00y) 84.66 +0.83% rebounded from 52-week lows found late last week.

The dollar's strength helped put a bid under the iShares MSCI Japan Index (AMEX:EWJ) $14.98 +0.94% after its recent retreat from $15.55 last week as investors in that region fear a weaker dollar's impact on exports.

The Airline Index (XAL.X) $51.06 +2.34% finished atop today's list of sector winners. Discounter JetBlue Airways (JBLU) $9.90 +4.21%, which has lost nearly half its value since the beginning of the year rose $0.40 after Raymond James upgraded the stock to "outperform" from "market perform" saying a "Return to Profitability" plan unveiled in April looks promising.

Despite a 3.3 basis point decline in the 10-year Treasury Yield ($TNX.X), homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 752.50 -1.96% fell to a fresh 52-week low.

The National Associates of Home Builder's index for sales of new, single-family homes fell to 45 in May from 51 in April, marking its lowest point since mid-1995, the association said Monday.

The April index was revised up one point from last month's preliminary estimate.

When the Housing Market Index is over 50, it means the number of builders who see "good" sales outnumber the number who see "poor" sales. The index, which is adjusted for seasonal variations, was based on a survey of 385 homebuilders, who answer questions about sales prospects now and in the near-term.

Additional economic data released today had The Federal Reserve Bank of New York's general economic index falling to a 12.4 reading, the lowest since June 2005, from 15.8 in April. Readings exceeding zero signal that more surveyed manufacturers reported business improvement than deterioration. The index averaged a 15.6 last year.

For those that have access to the OptionInvestor.com Market Monitor, I posted a 05/05/06 to 05/12/06 sector bell curve comparison from Dorsey/Wright and Associates at the bottom of today's Market Monitor.

This would encompass any sector strength/weaknesses found during last week's trade (Friday close to Friday Close).

Ideally I would like to update as of tonight's close for the Market Wrap, but with over 6000 point and figure charts to tabulate, I don't get these very revealing and institutionally monitored sector bullish % updates until well after my editor's deadline.

One sector bullish % that does signal further downside RISK for bulls is the Oil Service Sector Bullish % (BPOILS) where Friday's action had this sector bullish % reversing back lower to "bear confirmed" from a relatively HIGH level of bullish RISK.

Levels above 70% are deemed "overbought" and levels below 30% are deemed "oversold."

Bullish % for Oil Service - As of 05/12/06 Close

Imagine you are hand charting 100 point and figure charts of "oil service" stocks. Charles Dow did this on a nightly basis for the vast number of holdings he held in his portfolio, long before computers allowed for the computerized tracking of stocks on a supply (O) and demand (X) basis.

At the end of each night, Mr. Dow might have had two stacks of "oil service" point and figure charts on his desk. One stack contained those charts that still had a point and figure "buy signal" associated with the chart, the other stack containing those charts that had a point and figure "sell signal" associated with the chart. If Mr. Dow were tracking 100 oil service stocks, then at the close of Friday's trade, roughly 69%, or 69 out of 100 oil service stock charts he was plotting by hand (graph paper and a pencil) would still show a "buy signal" associated with its chart.

RISK (bullish or bearish) is a term that is sometimes "thrown around." However, the point and figure methodology using the 70% to 30% range helps give traders/investors a QUANTIFIABLE measure for defining RISK.


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Let's focus on the above bullish % chart for a minute and note that the recent 78% reading in May (blue 5) is/was a SIMILAR reading found in, say mid-January (blue 1 is early January) and (blue 2 is early February). This gives me (perhaps you) the observation that the oil service sector has recently experienced the same level of RISK as found in mid-January.

Let's also provide some focus to the BPOILS chart and that relative low bullish % reading of 46% in early March.

Once a "range" of RISK is observed, let's use our retracement tool on the Oil Service Index (OSX.X) from its recent high to March lows. I like to attach my retracement from a CLOSE to CLOSE.

Oil Service Index (OSX.X) - 05/15/06 Close

The MARKET is quick to remove RISK from a broader market index, but even more so from a SECTOR or individual stock. Bulls have the same level of bullish found earlier this year, when the OSX.X fell roughly 15% from its late January highs. Remember, RISK isn't found just among BULLS. When internals shift to the positive/bullish, BEARS will also experience RISK.

I see the OSX.X currently vulnerable to 200.00.

Of the various sector bullish % that Dorsey/Wright & Associates measures, the PRECious metals sector bullish % is most "overbought" at 86.76%. Yes, VERY strong, but VERY overbought.

I want to quickly follow up on the S&P 100 Index ($OEX.X). Here is a widely followed index of 100 very large U.S. based company's. According to Dorsey/Wright, of the 100 stocks, 63% (or 63 out of 100) still showed a point and figure buy signal associated with their chart as of Friday's close.

Let's stick with the same chart we viewed last week. The reverse h/s pattern still looks to be "in play" longer-term, but the odds of a 611.50 or 615 close on Friday is highly unlikely.

S&P 100 Index ($OEX.X) - Daily Intervals

OEX May calls/puts do not expire until Friday's close, but I think the OEX hard-pressed to settle above 600.00 by Friday's closing tick. May's "Max Pain" theory based on May call/put open interest is 595. Today's action did find what I consider to be PREMIUM SELLERS as the VXO.X spiked as high as 14.32, to then close at 12.87 -4.8%.

Other major index "Max Pain Theory" values are $113.00 for the DIA ($1.00 increments). For the SPX.X "Max Pain" is 1,300 (5-point increments), 1,700 for the NDX (25-point increments) and $41.00 for the QQQQ ($1.00 increments).

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