CRUDE OIL HITS RECORD HIGH -- MARKET FALLS IN HEAVIER TRADING -- AMGEN BREAKOUT CUSHIONS NASDAQ DROP -- RUSSELL 2000 MEETS SELLING AT OLD HIGH
ENERGY MARKETS HIT RECORD HIGHS... Crude oil closed above $61 today for the first time in history. Heating oil and gasoline futures prices also reached new records. While some of today's energy strength is due to hurricane activity, it demonstrates how little margin for error there is in the oil supply/demand equation. It seems every day the media has a new explanation for the continuing climb in energy prices. At the end of the day, the reasons don't really matter. The stock market continues to show that it hasn't adjusted to the new reality of oil in the 60's.
Chart 1
DOW DIAMONDS FALL ON RISING VOLUME ... The daily bar chart of the Dow Diamonds continues to paint a generally negative picture. The last time we showed the DIA, I pointed out the likelihood of chart resistance just over 104 (the broken June lows) and the 50- and 200-day moving averages. Today's downturn represents another failed attempt to gain any upside traction. The recent volume pattern remains negative as well. The volume bars show that the market continues to bounce on light volume, but sell off on heavier volume (see red circles). It did so again today.
Chart 2
S&P 500 SPDRS STILL LOOK TOPPY ... The S&P 500 SPDRs (SPY) also succumbed to another down day. If anything, the recent price bounce has the look of a "bear flag". [In a downtrend, a bear flag is identified by two rising parallel trendlines]. That still suggests to me the likelihood of an imminent test of its 50-day average and, in time, its 200-day line. The 12-day Rate of Change (ROC) has fallen further below the zero line which shows more deterioration in short-term momentum.
Chart 3
AMGEN CUSHIONS DROP IN NASDAQ ... The Nasdaq market suffered the smallest loss today of the major market averages. That was mainly due to the strong action in Amgen, which is one of the most heavily weighted stocks in the Nasdaq market. Chart 3 shows the biotech bellwether breaking through its June high on rising volume to achieve a bullish breakout. That helped the Biotech iShares (IBB) close over their 200-day moving average. See this morning's message for more on the biotech breakouts.
Chart 4
NASDAQ COMPOSITE STILL ON THE DEFENSIVE... The Nasdaq Composite lost 10 points today. On a percentage basis, that was only about half as much as the Dow and the S&P 500. But it fell on heavier volume and is still on the defensive. The daily chart shows the Nasdaq backing off from resistance at its February/March highs near 2100. There's been more volume on down days and less on up days. The 12-day Rate of Change (ROC) oscillator is trading below the zero line. And the MACD lines are still negative. The Nasdaq may be headed for a test of its moving average lines. Small caps have fared better; but there's a warning there as well.
Chart 5
RUSSELL 2000 IS SHOWING NEGATIVE DIVERGENCE ... Small caps have been doing better than large caps. But even that leadership group may start running into some trouble. Chart 6 shows why. First of all, the Russell 2000 Small Cap Index has reached its late December peak at 655 (see red circles). That's always a cause for some concern as short-term traders are tempted to take some profits. Both of the short-term oscillators shown on the chart have turned down and are showing "negative divergence". [That occurs when an oscillator starts to drop from overbought territory while the price is still rising]. The 9-day RSI line on top of the chart shows a pattern of lower highs from overbought territory over 70. In addition, the 12-day Rate of Change (ROC) has been falling for a month -- while the price of the RUT has been rising. The last time that type of negative divergence occurred was in March (first down arrow). The RUT fell sharply after that. There's no guarantee it'll fall again, but I wouldn't ignore the warning signs.
Chart 6
RISING OIL RAISES MARKET RISK ... A week or so ago I wrote that I thought the market had reached the top of its summer trading range. That was based partially on my belief that the market wasn't ready for crude oil in the 60's. It was also based on the action of the major market averages. After having risen on relatively light volume, the market backed off from major resistance levels on noticeably heavier trading. Virtually all of our shorter term indicators turned negative. That doesn't tell us too much about the long-term picture. But it does tell us that the higher oil prices are hurting the market. Seasonal patterns are also starting to work against the market. Most of the traditional summer rally normally takes place during July. As the summer draws to a close, seasonal trends turn negative into September and October. If the market can't gain ground in the summer, it's unlikely to do so in the fall. And it's unlikely to gain ground as long as oil continues to hit new records.
