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No Bell At the Bottom

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No Bell At the Bottom

There is no bell that rings when a market bottoms and that is as true in the energy markets as in any other market. Crude oil has fallen from a high of $147 on Tuesday to close at $129.29 today for a loss of more than $17 or -11.5% in just three days. Some say it is crude options expiring this week and crude futures expiring next Tuesday that created the volatility in the market. Others think it is the Iran meeting in Geneva this weekend. Others just think it was time for the bubble to burst.

There are as many reasons for the drop as there are traders and everybody has their own idea. The UN meeting with Iran in Geneva may have cooled the Iranian premium in the price but that was not the only thing pushing prices higher. It is strange that Iran denied the meeting as late as Tuesday.

There were reporters blaming the 3 million barrel build in inventories this week but that was just a timing problem caused by Hurricane Bertha clogging the shipping lanes and any real investor in crude knew that would happen two weeks ago.

Personally I believe the rally in crude came at the expense of the equity market. Crude has been rising for months while the equity markets crashed. Nothing on the equity side was working but the commodity trade was on fire. The commodity bubble burst over the last couple weeks but oil was the last price to get hit. The fundamental story was so strong on oil that new traders were still being enticed into the game as late as last week.

Once the equity market started to rebound there was a flood of money moving from commodities and back into equities. Financials, shorted for many months, were suddenly back in favor after Wells Fargo beat the street and raised its dividend. The fix was in and money headed for equities and out of crude. Who could fault selling crude over $140 and picking up financials at multi decade lows? The Fed was going to stand behind the big banks and prevent naked shorting of the primary dealers. The pressure was off and there were no revelations of new banks in trouble after IndyMac failed to tank the markets.

You did not hear a bell ringing in the equities market when the Dow traded at 10833 on Tuesday.  Neither was there a bell at $17 on the XLF signaling financials were ready to rocket again. There was a bell in the energy pit at 2:30 today when oil hit $129.03 but it was the closing bell not the bell at a bottom.

Multiple levels of support have been broken and there are still a couple days until the August futures expire on Tuesday. Critical support at $132 was broken and that suggests if interim support at $129 does not hold tonight we could see a retest of $122. With the 100-day average at $121 that would be a crucial test with $110 the next support. With support levels stretching out to $10 increments down to $100 and $90 there could be a lot of pain for the bulls still hanging on to positions in hope of an expiration miracle.

However, when a pipeline explosion in Nigeria as we had today does nothing to slow the drop in prices that may be a bell ringing that signals the end of a long rally rather then the start of a new one.

Jim Brown

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