MARKET BOUNCE STILL LACKS VOLUME -- DOLLAR FALL SHOULD BOOST COMMODITIES -- ENERGY STOCKS LOOK TOPPY
S&P 500 REACHES RESISTANCE LINE... Friday turned out to be a pretty good day. A strong jobs report, a bounce in Intel and chip stocks, and another drop in oil prices set a positive tone from the opening bell. Unfortunately, the day turned out to much less impressive than it appeared on the surface. First of all, volume was light once again. The volume bars in Chart 1 show that volume has been dropping in the S&P 500 all week. It was especially light today. Usually a budding uptrend sees more upside volume. So far we haven't seen that, which makes the recent rebound much less impressive. Chart 1 also shows that prices have reached a potential resistance line drawn over the March/April highs. Daily stochastic lines are also in overbought territory over 20. That suggests that the recent rebound may have reached an important test of its staying power.
Chart 1
DOLLAR CONTINUES TO SLIDE... The U.S. Dollar continues to drop. Last week the US Dollar Index fell beneath both moving average lines. It also broke a rising support line drawn under the February/April lows. A falling dollar usually boosts commodity prices -- and gold in particular. Chart 3 shows the CRB Index recovering some lost ground since the dollar peaked in mid-May. Gold has also regained some ground, but still needs to get back above $400 to turn its short-term trend higher. Gold stocks gained 2.4% on Friday as the dollar fell and bullion bounced.
Chart 2
Chart 3
Chart 4
CRUDE OIL FALLS UNDER $39 ... One commodity that didn't rise this week was oil. Its daily chart shows that key commodity breaking initial chart support at $39. This is the first break of a previous low since the start of April. Daily MACD lines have also turned negative. That helped the stock market this week, but hurt energy stocks. The fact is that energy stocks had already been weakening -- and may weaken further.
Chart 5
ENERGY STOCKS MAY BE TOPPING ... One of the principles of intermarket behavior is that commodity-related stocks usually peak before the commodity. That's why the next chart is so interesting. While energy prices hit a record high early this week, the Energy Select Sector SPDR peaked in late April. That created a negative divergence with the rising commodity. The three peaks formed since early March also have the look of a potential "head and shoulders" top. To confirm that bearish pattern, however, the XLE would have to break the "neckline" drawn under the March/May lows. The relative strength line has been dropping for three weeks and is testing the up trendline starting in February. A break of that line would be a negative sign for the energy sector.
Chart 6
MARKET STILL LACKS CONVICTION ... The technical indicators that we use to help us to identify the major trend of the market have improved over the last month, but have yet to turn positive. One of the main problems during the recent advance has been lack of volume. That shows lack of conviction on the part of buyers. Over the course of the last week, market leadership was seen mainly in defensive groups like consumer staples, drugs, and healthcare. That shows that the market still favors generally defensive issues. Two trends that emerged on Friday were positive. Technology was the strongest market sector, and energy was the weakest. That's a healthy combination for market. But one day doesn't make a trend. We'll need to see more of that type of action -- and a lot more upside volume -- to turn the recent bounce into something more lasting.
