OIL STOCKS ARE DOWN WHILE THE SOX IS UP -- THAT'S A GOOD COMBINATION IF IT CONTINUES -- CATERPILLAR BREAKS OUT -- VERISIGN IS CLOSE

OIL INDEX OVERBOUGHT ... I've mentioned several times over the past week that oil stocks are in a short-term overbought condition. With crude oil falling back from $50 today, some profit-taking is being seen in the energy patch. The 14-day RSI line carries a double message. The first is that it's in overbought territory over 70 which is a sign of an overbought market in need of a correction. The second is the slight "negative divergence" in the RSI line over the last week. Although the XOI hit a new high yesterday, the RSI formed a declining top, which is usually a sign of an impending correction. The Commodity Channel Index (CCI), which is plotted below the chart, also appears to be weakening. If today's selling starts to feed on itself, the XOI could decline to its 20-day moving average (near 670) or its July peak near 660. I've also suggested that crude usually weakens during October. If that happens, any significant pullback in the commodity and its related shares should be viewed as a buying opportunity.

Chart 1

SOX GAINS 2% ... While Energy is the day's weakest sector, the Semiconductor (SOX) Index is the strongest. The SOX Index is up 2% and is the day's top percentage gainer. I recently expressed the optimistic view that the SOX had probably bottomed. After slipping back under its 50-day average last week, it's trying climb back over it again. One encouraging sign is the fact that the daily MACD lines are still in positive alignment. The chip bounce is also boosting the Nasdaq market today. Two of the negative features of recent stock market action have been relative strength in Energy stocks and relative weakness in the chips. For today at least, that situation has reversed. Energy is down and the SOX is up. If that role reversal continues, it could give the market a much-needed boost.

Chart 2

CATERPILLAR BREAKS OUT... A bullish forecast released yesterday has lit a fire under Caterpillar which is the strongest stock in the Dow today. Chart 3 shows the stock catapulting through its 200-day average and its July high on strong volume. Chart 4 gives a yearlong view. Its most impressive feature is the jump in the relative strength line. The monthly bars in Chart 5 show that CAT has been an overachiever since 2000 and achieved a major bullish breakout in the middle of last year when it broke through its 1999 peak near 65. The fact that the 2004 pullback stayed above that breakout point is a bullish sign.

Chart 3

Chart 4

Chart 5

VERISIGN NEARS UPSIDE BREAKOUT... VeriSign is one of today's top Nasdaq gainers. The stock is rising on good volume and is challenging its summer high at 20. Its relative strength line is also near an upside breakout. That's a good combination.

Chart 6

QQQ BOUNCES OFF 50-DAY LINE ... The Nasdaq 100 Shares (QQQ) are continuing their bounce off the 50-day moving average. It's also the day's top percentage gainer among the major stock indexes. The QQQ/S&P 500 ratio line is moving up as well. That's good if it continues. Nasdaq leadership is needed if the market is going to muster a fourth quarter bounce. Some weakness in the energy patch -- and a stronger chip group -- would help as well.

Chart 7