GASOLINE HITS SIX-MONTH HIGH WHILE CRUDE IS TESTING OLD HIGH -- UTILITY FALL MAY BE EARNING MARKET WARNING -- HEALTHCARE BREAKS DOWN
GASOLINE CONTINUES TO CLIMB ... It's no secret that energy prices are climbing again. And that shouldn't be a surprise to anyone who watches price charts. Back on March 29, for example, I showed the futures price of gasoline breaking through its January high at 1.89 to reach a new six-month high. That upside breakout helped explain why money was pouring back into the energy sector. Chart 1 is an updated version of that earlier chart and shows gasoline futures climbing over $2.00. There's no chart reason why it couldn't eventually reach its 2005 highs in the $2.20-$2.40 region. Crude oil is already testing those old highs. Chart 2 paints an even stronger chart picture for crude oil. That key commodity is challenging its January high near $69 dollars a barrel. While it may stall temporarily near that level, the chart pattern since last August looks like a potential "symmetrical triangle". That pattern is identified by two converging trendlines and is usually resolved to the upside. What crude oil does in this area could have a big impact on energy stocks and the market as a whole. Energy stocks have become market leaders once again and would continue to benefit from rising oil prices. Unfortunately, rising energy prices (combined with rising bond yields) are already starting to worry the stock market. A crude oil close over $70 would have an even more negative impact on the stock market.
Chart 1
Chart 2
OIL SERVICE ETF IS OVERBOUGHT ... One argument for a short-term pullback in energy prices comes from the chart of the Oil Service Holders (OIH) which have been the strongest part of the energy parch. The OIH has reached its January high just over 155 and is pulling back a bit. That's to be expected in light of the fact that the OIH is also in a short-term overbought condition. That's shown by the 9-day RSI line (black line) which had reached overbought territory over 70 (the upper horizontal line). Those two factors combined probably account for today's modest profit-taking in energy stocks. This occurs at the same time that an overbought gold market is struggling to hold onto $600 while the Gold Bugs Index (HUI) is meeting some resistance at its January high (Chart 4). In fact, the two charts look very similar. The 9-day RSI line for the HUI is also pulling back from overbought territory over 70. That tells me that the commodity rally is probably just taking a breather. The major trend, however, is still up.
Chart 3
Chart 4
UTILITIES AS LEADING MARKET INDICATOR? ... In the past, utilities usually acted as leading indicators for the rest of the market. That's because of their close link to bond prices. Historically, bond prices peak before the stock market. The same has been true of utilities. Which is why Chart 5 may carry an ominous message to it. The Dow Utility Average peaked last September and has been falling since then. It's now trading below its 200-day moving average and has been one of the year's worst performers. That's happening at the same time that bond yields are rising and bond prices falling. The falling utility sector may be an early hint that rising rates are already starting to hurt some market groups that are most sensitive to the direction of bond yields and have a history of peaking before the rest of the market.
Chart 5
HEALTHCARE BREAKS 200-DAY LINE ... Back on March 22 I wrote a positive story on healthcare. At the time, I described the price pattern on the daily chart of the Health Care SPDR (XLV) as a bullish " ascending triangle". As Chart 6 shows, however, that analysis proved incorrect. The earliest warnings were the break of the lower trendline and the 50-day moving average (blue arrow). An even more negative turn occurred with the breaking of the 200-day line. While a lot of today's selling is coming from the 17% plunge in the stock of Bausch & Lomb, it's clear that April selling in drugs and biotechs have also been contributing factors to the healthcare slide. Chart 7 shows the Pharmaceutical Index trading below its 200-day line. Chart 8 shows the Biotech Index heading for a test of that long-term support line at 660. One of the reasons I was attracted to healthcare was based on its history as a defensive sector. Obviously, that hasn't worked this time. Once again, however, the breaking of 50-day averages proved to be a valid sell signal. Speaking of 50-day averages, a number of key market indexes appear headed for a test of that initial support line. We'll take a look later in the day to see if any of them get broken.
Chart 6
Chart 7
Chart 8
