ENERGY STOCKS NOT CONFIRMING OIL HIGH -- PAPERS WEIGHING ON MATERIALS -- MMM HURTS DOW -- S&P 500 TESTING LATE-SEPTEMBER LOW

MMM LEADS DOW LOWER... Although all the major averages are starting the week on the downside, the Dow is the biggest percentage loser. That's mainly due to today's chart breakdown in MMM. Chart 1 shows the big Dow stock falling under its spring low this morning to reach a new low for the year. And it's doing it on heavy volume -- a bad combination. The stock actually peaked during June, and has been trading under its moving average lines for a month. Its relative strength line (versus the Dow) shows that MMM has been a Dow underachiever since July. That's another example of why I generally avoid stocks that are in downtrends and that are showing bad relative strength.

Chart 1

ENERGY STOCKS DIVERGE FROM OIL... Although crude oil touched another record high this morning, oil stocks continue their downside correction. Chart 2 shows the Energy Select SPDR meeting resistance at its 20-day moving average. The Parabolic SAR points are still on a short-term sell signal. And, the black Average Direction (ADX) line has started to drop. I recently wrote that a downturn in the ADX line usually was a sign of a short-term top. I point this out for two reasons. One is that there now exists a short-term divergence between oil and its stocks. And, since the stocks usually lead the commodity, I suspect this is hinting that this morning's new high in oil is on weak ground. One of our readers asked if this was time for long-term investors to start buying energy stocks. Although I continue to like the long-term prospects for energy, I'd hold off on new purchases until there's more evidence that the downside correction is over.

Chart 2

PAPERS WEIGH ON MATERIALS ... Basic materials stocks saw heavy selling last week. Chart 3 shows the Materials Select Sector SPDR retesting its 50-day average -- as are some of the big base material stocks like Alcoa and Phelps Dodge. Most of today's selling, however, is coming from paper & forest product stocks. Chart 4 shows Georgia Pacific breaking its 200-day moving average. As I suggested last week, heavy profit-taking in this group has removed one of the bullish props under the market. Any more selling would only make matters worse.

Chart 3

Chart 4

DOW AND S&P TEST CHART SUPPORT... The Dow Diamonds are drawing dangerously close to their August low. The 9-day RSI line is close to oversold territory at 30. The S&P 500 SPDRs are challenging initial support at their late September low. That puts both market benchmarks in important tests of chart support.

Chart 5

Chart 6