HEAVY SELLING IN ENERGY AS OIL FALLS $2 -- CRB INDEX BACKS OFF FROM MARCH PEAK -- ALCOA AND NEWMONT MINING WEAKEN

CRUDE DROP HURTS ENERGY SHARES... On Monday I wrote about energy shares looking over-extended and vulnerable to some profit-taking. They've been the weakest part of the market over the last two days. Not surprisingly, crude oil dropped more than $2.00 today as well. That's not surprising because energy shares usually lead the commodity. Charts 1 and 2 are updated versions of the two charts I showed on Monday. On Monday I showed a "negative divergence" on the RSI line for the Energy Sector SPDR (XLE). Chart 1 shows the RSI falling below the 50 line which indicates more selling. The noticeable pickup in downside volume this week is another negative sign (see red volume bars). A test of the blue 50-day average appears likely. Chart 2 shows the ADX line for the Oil Service Holders (OIH) turning down more decisively since Monday. That's indicative of a short-term peak. The convergence of the +DI and -DI lines has reached the point where the red selling line may be crossing over the green buying line for the first time since May. Notice also the heavy selling this week. All of which points to institutional selling in the oil patch. That doesn't mean that they've turned bearish on oil, just taking some profits. The next test of institutional support will come at the 50-day moving average.

Chart 1

Chart 2

CRB INDEX BACKS OFF FROM 2005 HIGH ... Oil isn't the only commodity that's attracting some short-term selling. The CRB Index fell nearly 5 points today with most commodity markets in the red. Its daily chart shows the CRB backing off from chart resistance at its early March peak. The 20-day Commodity Channel (CCI) Index shows the CRB in an overbought condition. That's causing some short-term selling in gold and even copper. [On Monday I pointed out that gold was in a short-term overbought condition as well]. That explains why basic materials stocks like Alcoa, Phelps Dodge, and Newmont Mining are down today. Charts 4 and 5 show Alcoa and Newmont Mining meeting selling near their 200-day moving averages. Today's strong PPI number isn't helping commodities, but may be hurting rate-sensitive groups like homebuilders. More on that later.

Chart 3

Chart 4

Chart 5