OIL JUMPS OVER $30 -- LONG-TERM RATES HAVE BOTTOMED -- DOLLAR IS OVERSOLD -- STOCK TREND STILL UP

CRUDE JUMPS $1.55... Energy prices spiked higher today. Heating oil gained 4.84 points to lead the advance. Crude oil futures prices jumped $l.55 to close back over $30. That doesn't really change the overall direction of oil, which has been trading sideways for months. To turn the trend of crude higher, it would have to break through its August-October highs near $32.50. So far this year energy has been the weakest portion of a strong commodity group. That's why energy stocks as a group have done so poorly this year -- both on an absoute and relative basis.

Chart 1

ENERGY SECTOR STAYS SOFT... Today's spike in oil created some interest in oil shares. The Energy Select Sector SPDR has been trading in the lower end of its two-month trading ragne. The falling relative strength line shows that energy has been a market laggard this year. A move over its 50-day line would be the first step needed to garner any interest in this group. A close over 25 would be a lot better.

Chart 2

ENERGY PRICES BOOST CRB INDEX... One thing today's spike in crude oil, heating oil, and natural gas did do was give a big boost to the CRB Index of commodity prices. The CRB jumped 3.42 points. Although 12 of the 17 commodities gained today, the three energy markets were the upside leaders. The CRB closed just shy of its recent high near 250. That's an important level because it also represents a test of the highs reached back in February -- as shown in Chart 3. Needless to say, the ability (or inability) to get through that prior peak will determine the direction of commodity prices over the short- to intermediate-term. One of the side-effects of higher commodities is rising long-term rates.

Chart 3

BOND YIELDS HAVE BOTTOMED... Stronger commodity prices are usually associated with a stronger economy. That combination usually results in higher long-term interest rates. And that's what the charts of bond yields seem to be saying. Since June, the 10-year T-note yield has climped to 4.50% and the highest level in a year. More importantly, it's also testing a three-year down trendline. A signficant breach of that line would confirm that the trend of long-term rates has turned higher. Momentum indicators are already pointing in that direction. The monthly MACD lines along the bottom of the chart have turned in convincing fashion for the first time since the start of 1999. It's already broken its major down trendline. The monthly RSI line (along the top) is close to moving over 50 for the first time in three years. All of which strongly suggest that bond prices have peaked. Over the short-run, rising interest rates may be good for stocks. That's because money coming out of bonds finds its way into stocks. Further down the line, however, rising rates may have a dampening effect on the economy and the stock market.

Chart 4

DOLLAR IS OVERSOLD, BUT STILL IN DOWNTREND... The U.S. Dollar has been in a bear trend since the start of 2002. While the overall trend is still down, the dollar is in a potential support area and looks oversold. The monthly bars show that the Dollar Index is finding some support near near its 1990 low around 90. The monthly RSI line is also bouncing from oversold territory under 30. That suggests that a bounce is due. The monthy MACD lines, however, are still bearish. And, the Dollar Index remains below the dashed 20-month moving average. The short-term direction of the dollar could have an impact on commodity prices. The major downtrend in the dollar is one of the ingredients of a bull market in commodities. Any short-term strength in the dollar, however, could postpone an upside breakout in the CRB Index and the gold market.

Chart 5

STOCK RALLY STILL INTACT -- BUT OVERBOUGHT... The weekly chart of the S&P 500 shows the dilemma chartists face at this point. The trend is still higher. As trend-followers, our job is to participate in that trend. The problem is that many of our momentum indicators are overbought (like stochastics) or giving negative divergences. That raises our concerns about the longevity of the current rally. What to do? My suggestion is to stay with existing positions, but with a close eye on underlying support levels. The monthly Bollinger Band for the S&P 500 sits at 1105, which is our next upside target. The daily S&P 500 chart shows a pattern of rising highs and lows, which is the most basic definition of an uptrend. Two important support points worth watching are the 50-day average (currently at 1029) and the mid-October low at 1018. Decisive closes below either/or both of those levels would warrant some profit-taking. Until then, we're nervously staying with the rising trend.

Chart 6

Chart 7