OIL STOCKS RALLY -- MARKET LOOKS OVERBOUGHT
ENERGY STOCKS SHOW SOME LEADERSHIP... In a mildly down market, energy stocks were the top gainers. The Oil Service Index (OSX) has risen to the highest level in more than two months. It's relative strength line has been weak, but may be turning up. The AMEX Oil Index (XOI) also had a good day. That energy index has risen above its 200-day moving average, and is trading at the highest level in four months. It's relative strength line has also been weak of late. That's why we're paying a little more attention to this week's rally. This may be the first time in at least two months that oil stocks are showing any signs of market leadership. We point this out for two reasons. With crude bouncing off major support near $25, higher oil stocks may be hinting at a rebound in oil. In addition, any upside leadership by oil stocks (not to mention rising oil prices) usually comes at the expense of the rest of the market.
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OIL AT $25 SUPPORT AND OVERSOLD... The price of crude oil recently tumbled from long-term resistance at $40 to some potential chart support near $25. The weekly chart shows that $25 was the low hit during November of last year -- just prior to the last runup. At the very least, the $25 level may stem the oil price decline. It may even give way to rally attempt -- possibly back to the $30 level. The weekly stochastics lines are also in oversold territory under 20. This is what the rising oil stocks may be hinting at.
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S&P 500 TESTING JANUARY HIGH... The S&P 500 (and several other major stock averages) have reached a potential resistance barrier at its January high. The daily RSI and stochastic oscillators are in overbought territory -- and are showing some signs of rolling over. Any rise in oil prices might be enough to cause some profit-taking. As we also suggested today, a new drop in the dollar -- and falling bond yields -- may be hinting at more economic weakness which could also cause profit-taking in stocks. The weaker dollar may give a boost to gold and oil.
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