OILS CORRECT WHILE TECHS RALLY -- AMAZON LEADS INTERNET HIGHER -- DOW RECLAIMS 50-DAY AVERAGE -- CATERPILLAR EXPLODES
OILS CORRECT AS CRUDE BACKS OFF FROM $50 ... With crude oil back under $50, traders are taking some profits out of an overbought energy sector. Earlier today I showed the AMEX Oil Index pulling back from a short-term overbought condition. While energy was the biggest sector loser today, oil service stocks had the biggest percentage loss. But the story is essentially the same. The 14 day RSI line shows the OIH to be in overbought territory over 70 for the first time since February. Today's loss of 1.7% also came on the heaviest trading in a month. That shows a sense of urgency among the sellers and is reflective of a short to intermediate term top. The daily MACD lines along the bottom of the chart are still positive, but have reached resistance along their early 2004 highs. That also suggests the need for some correction or consolidating action to work off the overbought condition. If a correction does materialize, major support is seen near the February/July highs in the 75-76 region. That also coincides with the 50-day average which is another important line of defense. I've written that I consider the oil service group to be the best energy value. That's the long term view. The short term view, however, is to wait for a better entry point at lower levels. Shorter term traders with big profits might even consider taking some money off the table here.
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YAHOO LEADS INTERNET GROUP HIGHER ... My mid-day update showed the Semiconductor (SOX) Index helping to lead the Nasdaq higher today. By day's end, however, the Internet group turned out to be the bigger winner in tech-land. Chart 2 shows the IIX Internet Index bouncing off its 50-day moving average. One of the big reasons was Yahoo, which hit a new three-month closing high on rising volume (Chart 3). The AMEX Internet Holders (HHH) were one of the day's biggest ETF gainers (Chart 4). Its RSI line is bouncing off 50, which is a sign of strength. And the HHH is finding support near its 20-day moving average, which is a sign of relative strength. Even more impressive is its rising ratio line (beneath the chart) which has been outperforming the Nasdaq since early August.
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FALLING OIL AND RISING TECH IS A GOOD THING... Two good things happened today. Oil prices fell and oil shares were the day's weakest sector. And technology was the day's top sector. Although it's only one day, that role reversal is a good thing for the market if it continues. Earlier this year, I talked about why market leadership by energy stocks -- combined with loss of Nasdaq leadership -- was bad for the market. That was in the first quarter as the market was peaking. If today's rotation out of energy and into technology can be sustained, the odds for a fourth quarter stock market rally will be greatly enhanced. Chart 5 shows the Nasdaq 100 Shares (QQQ) continuing yesterday's bounce off the 50-day line on rising volume. It's been outperforming the S&P 500 since mid-August.
Chart 5
DOW REGAINS 50-DAY AVERAGE ... The Dow Industrials climbed back over their 50-day moving average today. Upside volume was pretty decent as well. The biggest Dow winner was Caterpillar which broke through its summer high on huge volume (please see mid-day update for more on CAT). Alcoa also rose on strong volume and is nearing a test of its summer high and its 200-day moving average.
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