OVERBOUGHT MARKET CORRECTS AS VIX JUMPS -- CRUDE OIL CRACKS $65 AS XLE HITS NEW RECORD -- JAPAN CORRECTS
CRUDE TOPS $65 -- XLE HITS RECORD HIGH ... Crude oil continues to climb after recently breaking through its mid-December peak at 62. That upside breakout signaled that the downside correction starting in early September had been completed and that its intermediate trend had turned higher. Rising crude prices are good for energy stocks, but not for the rest of the market. Especially when the market has reached overbought territory as this one has. The recent rally in energy shares has been led by the oil service group which was the first part of the energy patch to move back into record high territory. In today's trading, the Energy Select SPDR (XLE) is breaking through its late September peak to reach a new record. Its relative strength line has risen to a new three and a half month high. I suspect that today's move by the XLE to new high ground may explain part of the selling the broader market. That's because energy shares usually lead the price of crude, and those new highs by energy shares are hinting at eventual new highs by crude as well. [Notice that the recent XLE bounce off its 50-day moving average presented a good buying opportunity. That's one of the reasons why it's always a good idea to keep a close eye on that moving average line].
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JAPAN CORRECTS ... The Nikkei Index 225 fell 2.8% and was the biggest loser among global markets. [Asian markets fell harder than Europe, possibly owing to profit-taking in semiconductors and technology stocks]. The Japanese yen is also falling 1.4% today. That combination has pushed Japan iShares (EWJ) down 3.5%. Chart 3 shows that the EWJ has also broken its (dashed) 20-day average for the first time in three months. That increases the likelihood that the EWJ may test its lower band and/or its 50-day moving average before this correction has run its course. Those two support lines currently range from 13.12 to 13.06. Today's action should give short-term traders reason to take some profits, but may provide longer-term investors another buying opportunity at lower levels.
Chart 3
THE VIX IS RISING ... Last Thursday I wrote an article on how the low level of the Volatility (VIX) Index could increase stock market risk. Not only is the VIX at the lowest level in a decade (which shows investor complacency), but it had started to bounce off its summer low near 10. I suggested that an upturn in the VIX from current levels could upset an overbought stock market. That would be especially true if the VIX broke through initial resistance at 12.51. Chart 4 shows the VIX gapping sharply higher today and threatening its December highs. An upside breakout would put the VIX at the highest level in two months and could cause more stock market selling.
Chart 4
THE DOW IS BACK UNDER 11000... A lot of excitement was created last Monday when the Dow exceeded 11,000 for the first time in four years. I cautioned, however, that the Dow needed a weekly (Friday) close above that level to confirm the upside breakout. It didn't get it. The Dow ended the week back below that resistance barrier and is back under 10900 today. That's probably due to the short-term overbought market that I wrote about last week. The 9-day RSI line turned down from overbought territory over 70 and also created a "negative divergence" below its late November peak. While no serious technical damage has been done to the recent uptrend (at least as long as the 50-day line holds), last week's upside breakout has been negated for now. The weekly bars in Chart 6 show that the Dow is back within its 2005 trading range and below last spring's high at 10984.
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