MARKET PULLBACK CONTINUES -- ENERGY PRICES JUMP WHILE THE CHIPS FALL -- GOLD STOCKS BREAKOUT -- JAPAN MAY HAVE BEGUN OVERBOUGHT CORRECTION
DOW LOSES MORE GROUND ... The market lost more ground today. The Dow Industrials fell 55 points to close at 10755. That puts it within 55 points of its summer highs near 10700. The market got hit with two negatives today. One was a sizeable pullback in semiconductors which had recently emerged as market leaders. The other was a big jump in energy prices owing to cold weather in the northeast. Crude rose 2.4% while natural gas soared 10%. That's bad news for a market struggling from an overbought condition.
Chart 1
CRUDE CLOSES OVER 50 DAY AVERAGE ... Crude oil rose $1.71 today to close over its 50-day moving average for the first time in more than two months. Natural gas soared 10% to a new all-time high. Needless to say, that had a bullish influence on energy shares which rose strongly today. The strongest part of the energy patch was oil service. The day's strongest ETF was the Oil Service Holders (OIH) which gained more than 3% to reach a new record high. That's a good example of stocks leading their respective commodity. I recently wrote that a new high by the oil service group was incompatible with falling oil prices. That's a good reason why commodity traders should keep on eye on related stocks. Much of the market's fourth quarter rally was predicated on weak energy prices. With energy prices on the rise again, stock traders are locking up some of their profits.
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SEMICONDUCTORS LOSE GROUND ... The other problem for the market today was falling chip stocks. The Semiconductor (SOX) Index lost 1.7% and was one of the day's biggest losers. Chart 4 shows the SOX pulling back to the area around its summer highs just above 480. Its 20-day moving average sits at 480. That's an important first line of support. Chart 5 shows that today's sizeable price decline in the Semiconductor Holders (SMH) took place on heavy trading. That's not supposed to happen in a healthy pullback. The SMH is threatening its 20-day average at 37 which is its first line of defense. Whether or not it holds that line will help determine if there's more selling to come.
Chart 4
Chart 5
GOLD STOCKS BREAK OUT ... Gold bullion climbed over $5.00 today to end at $519 which is the highest level in twenty-four years. Gold has now exceeded its 1983 peak at $514. Despite my concerns about a possible pullback around the $500 area, bullion shows no signs of slowing down. That may be partially due to the bullish action in gold stocks. Although the XAU Index had recently achieved a major bullish breakout, Newmont Mining (the biggest stock in the XAU) hadn't yet done so. Neither had the AMEX Gold Bugs Index (HUI). The next two charts show, however, that both have now joined the XAU in new high ground. The weekly bars in Chart 6 show Newmont closing over 50 for the first time in two years. Chart 7 shows the HUI breaking through its late 2003 highs to achieve a bullish breakout as well. The HUI/SPX ratio in Chart 7 has just broken a two-year down trendline. That's tells me that gold stock leadership is going to continue as is the bull market in bullion.
Chart 6
Chart 7
JAPAN STARTS CORRECTION... Over the weekend, I suggested that the high-flying Japanese market had finally reached an overbought condition and was ripe for some profit-taking. In last night's trading, the Nikkei lost nearly 2% for the biggest drop among the foreign markets. Chart 8 shows the daily action for the Japan iShares (EWJ). The daily MACD lines haven't turned negative yet, but are close to doing so. The inability of the MACD lines to reach their early October peak presents a negative divergence. The large red volume bars show that volume has turned negative over the last week. I suspect that Japan has entered a short-term correction. I wouldn't be surprised to see the EWJ retest its 50-day average near 12.20.
Chart 8
