GOLD AND OIL STOCKS ARE TESTING MAJOR SUPPORT LEVELS -- THEIR RECENT WEAKNESS HAS BEEN DUE TO A RISING DOLLAR AND HAS HELPED STOCKS RALLY
OIL SERVICE INDEX TESTING 200-DAY AVERAGE... Oil service stocks, which have corrected downward with the price of crude oil, continue to test important chart support. Chart 1 shows the OSX trying to bounce off its 200-day moving average. The Commodity Channel (CCI) Index shows that the OSX is in oversold territory. The weekly bars in Chart 2 show that the OSX is also testing a rising trendline that starts near the end of 2003. That's a pretty important support line. Even though energy stocks are starting to bounce a bit, the OSX still has a ways to go to reverse its recent downtrend. Chart 1 shows a falling trendline starting in early April. The OSX needs to clear that falling resistance line to improve its short-term trend.
Chart 1
Chart 2
GOLD INDEX TESTS SPRING 2004 LOW... The Gold/Silver (XAU) Index has been falling throughout 2005 as a result of a stronger dollar. The XAU, however, has reached another critical chart point. Chart 3 shows that the XAU is now testing chart support formed in the spring of last year. A case can be made that gold stocks have been in a big trading range since the end of 2003. If that's what's really going on, the XAU is now testing the bottom of that trading range. The monthly bars in Chart 4 show two other reasons why gold stocks are at a critical chart point. One is that the XAU is at the 50% retracement point of the 2000-2004 uptrend. The other is that it's testing the up trendline starting at the end of 2000. Just recently I showed a similar chart plotted on a logarithmic scale which showed that the long-term support line had already been broken. Chart 4 shows that the same trendline shown on an arithmetic scale is still being tested.
Chart 3
Chart 4
INTERMARKET RIPPLES ... The current position of gold and oil stocks are important -- as is the trend in the dollar. The recent upside breakout in the dollar pushed commodity prices lower and contributed to sector rotations out of commodity-related stocks into the likes of financials, retailers, and technology. That helped the market survive a challenge of 200-day averages and has contributed to its recent upturn. That's why the relationship between commodities and the dollar is important to the stock market. And that's why the current test of support going on in gold and oil stocks is important.
