OIL IS BOUNCING OFF 200-DAY AVERAGE WHILE OIL STOCKS RALLY -- OIL SERVICE HOLDERS TEST RECENT HIGH -- CRB INDEX IS ALSO BOUNCING OFF ITS 200-DAY LINE

CRUDE OIL BOUNCES OFF SUPPORT LINES... After losing more than 20% since the end of August, crude oil prices are starting to bounce off two lines of potential chart support. One is the horizontal line in Chart 1 which is drawn under the July lows. The other is the 200-day moving average. The Commodity Channel (CCI) Index is trading in oversold territory. The latest low is slightly higher than the early October low which suggests a "positive divergence". Perhaps the most compelling sign that fourth quarter slide in oil prices may be nearing an end is the rebound in energy shares, which often lead the commodity at turning points.

Chart 1

ENERGY SPDR CLEARS 50-DAY LINE ... The Energy Sector SPDR (XLE) not only stayed well above its 200-day average during its recent downside correction, but it's climbed back over its 50-day line. The XLE is moving up to challenge its early November peak just above 51. A decisive close over that level would turn its short-term trend back up again. Oil Service stocks are doing even better. Chart 3 shows the Oil Service Holders (OIH) challenging their recent highs. It's hard to imagine a bullish breakout into new highs by the oil service group coinciding with falling oil prices. Most other commodity are higher today. The CRB Index is also bouncing off its 200-day line.

Chart 2

Chart 3

CRB INDEX BOUNCING OFF ITS 200-DAY LINE... The CRB Index is also starting to bounce off its 200-day line. Chart 4 shows the CRB plotted through yesterday (Monday). It's up 2.12 points this morning with the vast majority of commodity markets in the plus column. Energy is leading the CRB rally while gold is climbing near $5.00. Gold is trading at $494 and is drawing closer to its next major upside target near $500. The jump in energy prices appears to be causing some short-term profit-taking in an overbought stock market.

Chart 4