FED TIGHTENS AS EXPECTED -- MARKET STILL TESTING OVERHEAD RESISTANCE -- DROP IN OIL WEIGHS ON ENERGY SECTOR

CRUDE NEARING TEST OF 200-DAY AVERAGE ... Crude oil prices fell over a dollar today and ended back under the $50 level. That continues the short-term downtrend that started in mid-March. Chart 1 shows that crude is nearing a test of its 200-day moving average. It bounced off that long-term support line in early February, but slipped beneath it temporarily in December. If oil were to drop under $48, the next level of potential support would be near $45. Crude weakness continues to punish energy stocks which were the day's weakest group. So far, that's having only a minimal impact on the rest of the market.

Chart 1

ENERGY STOCKS CONTINUES TO LOSE ... The market continues to lose energy leadership. Charts 2 and 3 show the relative weakness in the Energy Sector SPDR (XLE) and the Oil Service Holders (OIH) since March. Oil service stocks are the weakest group in the oil patch. Chart 3 shows the OIH testing initial support at their December high. Its relative strength line has dropped to a three-month low. While falling oil prices -- and a weaker energy group -- is theoretically positive for the market, some other group or sector needs to take over the market leadership that had been provided by energy. The logical candidates are consumer discretionary stocks (like retailers), financials, and maybe even technology. So far, their gains have been relatively small. It's possible that the drop in crude oil --along with other commodities -- is hinting at economic weakness, which isn't necesarily good for stocks. That may also explain why bond yields dropped again today in the face of another Fed tightening.

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STOCKS TURN IN MIXED DAY ... The market's reaction to the Fed's move to raise short-term rates another quarter point was somewhat muted. The Dow and the Nasdaq managed small gains, while the NYSE Composite Index, the S&P 500, and the Russell 2000 fell a bit. Volume picked up from yesterday, but didn't give any clear signals given the mixed price action. The three charts below show a market that continues to test some overhead resistance barriers. The Dow Diamonds (DIA) closed marginally over its last week's high, but is still testing resistance at its 200-day average and a down trendline drawn over its March/April highs. There's also potential resistance at its late January low just over 103. The S&P 500 is still stuck below last week's high and a two-month down trendline. The Nasdaq gained a little more ground on rising volume, but remains below initial resistance at 35.71. Very little has changed over the last couple of days. The downtrend that started in early March is still intact, but is being tested. We'll be watching that test very closely for the rest of the week.

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