FALLING OIL GIVES MARKET A LIFT -- DOW CLEARS MOVING AVERAGE LINES -- HEALTHCARE ETF HITS NEW HIGH
OVERBOUGHT CRUDE OIL BACKS OFF FROM $70 ... Crude oil fell another $1.61 today and gave a boost to the stock market. With all the concern over Hurricane Katrina last week, it was easy to lose sight of the fact that crude oil was probably ready for a correction anyway. The daily chart shows that the upward spike last week to $70 was accompanied by a negative divergence on the RSI line which formed a "lower low" near overbought territory at 70. In addition, markets often correct at round numbers like $70. [That was also my next major upside target]. There's no evidence that the major uptrend in crude has peaked. It could, however, drop to initial support near $63 which also coincides with its 50-day moving average. Although energy stocks were the day's weakest sector, they did manage to close higher after a lower opening. Chart 2 shows the Energy Select SPDR (XLE) staying above its August high. Its RSI line is modestly overbought, but the daily MACD lines have turned positive. The XLE is still well above its 20- and 50-day moving average lines. So far, traders haven't lost confidence in their energy holdings.
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Chart 2
DOW CLOSES BACK OVER MOVING AVERAGES ... By last Friday, most of the major stock indexes had closed back over their 50-day moving averages. All except the Dow. But that changed today. Today's 141 point advance pushed the Dow Industrials back over their 50- and 200-day moving averages. That puts all of the stock indexes back in short-term uptrends. But there's more. The 9-day RSI line has moved back over 50 which is a sign of more to come on the upside. The 12-day Rate of Change (ROC) line has moved back over the zero line, which is another positive sign. Finally, the upside turnaround in the middle of last week came right at the rising trendline drawn under the May-July lows. Volume picked up across the board today, but didn't come close to matching last Wednesday's upside turnaround. I suspect that the market will attempt a retest of its recent highs. After that, I'm skeptical about its staying power. That's because the improvement that's taken place in short term momentum is offset by deterioration in longer-term indicators.
Chart 3
BIOTECHS AND DRUGS GIVE HEALTHCARE A LIFT ... While all sectors closed higher today, healthcare had the best chart day. Chart 3 shows why. The Health Care Sector SPDR (XLV) closed at a new 52-week high. Its relative strength line turned up at the end of August and has been rising since then. A lot of today's buying came from biotechs and drugs. The Biotech Index hit another multi-year high while the Pharmaceutical Index has climbed back over its 50-day line. The DRG/SPX ratio (solid line in Chart 6) is starting to bounce after several months of drug underperformance. Earlier in the year I included healthcare as one of my favorite market sectors. In addition to its good chart action, it also qualifies as a defensive sector. That's a good combination in an uncertain market.
Chart 4
Chart 5
Chart 6
