OIL FALLS BELOW $70 AND CAUSES ENERGY PROFIT-TAKING -- GOLD AND METALS STOCKS RISE WITH THE EURO -- USING PRICE CHANNELS TO STAY WITH A TREND

CRUDE FORMS SHORT-TERM TOP ... Crude oil prices fell sharply for the second day in a row. More importantly, today's drop of $2.68 puts it back below $70 for the first time in three weeks. That breaks the intra-day low hit last week and has left behind a small "double top". That probably doesn't have long-range significance, but suggests that traders have started to take some profits. The next test of support will be its January high near $69 (flat line). Short-term indicators have also turned negative. The 20-day Commodity Channel (CCI) Index has fallen to the lowest level in more than a month, while the daily MACD lines have turned down for the first time in two months. That may be giving a boost to the stock market, but is causing selling in energy shares.

Chart 1

OVERBOUGHT ENERGY STOCKS PULLBACK ... With crude and gasoline prices falling, it's not surprising to see energy shares falling as well. The Commodity Channel Index in Chart 2 (Oil Service Holders) is pulling back from overbought territory. And the daily MACD lines appears to be topping. The price bars are starting to pull back from their upper Bollinger Band. However, no serious chart damage has been done. The first level of support is the 20-day moving average (dashed line). Chart 3 shows a slightly weaker picture for the Energy SPDR (XLE). It failed to reach a new high and is already threatening its 20-day average. If the XLE weakens further, there's more serious support near 55 which also coincides with lower Bollinger band and moving average support. Its daily MACD lines, however, have turned down. That suggests that the XLE may indeed pullback toward that 55 level. Short-term traders have probably seen enough to justify some partial profit-taking on energy positions. Those with a longer time perspective should hold off on any selling until the late April lows are broken.

Chart 2

Chart 3

GOLD AND MATERIALS CONTINUE TO CLIMB ... While energy prices are falling today, metal prices and their stocks continue to climb. Chart 4 shows the Gold & Silver (XAU) Index closing at a new all-time high. It's been trading over the 20-day average (dashed line) since the middle of March. That makes the 20-day average an important support line to watch. The Materials Sector SPDR (XLB) is also being led to near record highs by rising metal stocks. Three of today's top five percentage gainers are Freeport McMoran Copper and Gold (FCX), Phelps Dodge (PD), and Alcoa (AA). Aluminum and copper prices remain very strong. Chart 5 shows the XLB having just bounced off its 20-day average last week. That makes that the first line of support on any short-term pullbacks. The XLB would have to break last week's low at 33.25 to justify any selling.

Chart 4

Chart 5

THE EURO HITS NEW RECOVERY HIGH ... The European central bank left rates unchanged this morning. The president of the ECB, however, stated that rising inflation pressures made a rate hike likely during June. That gave another boost to the Euro and hurt the U.S. dollar. The daily chart shows the Euro having broken through its summer highs to reach the highest level in nearly a year. Its weekly chart shows that the upside target is just above the 130 level. Most foreign currencies gained against the dollar today. That's keeping a strong bid under the gold market.

Chart 6

Chart 7

USING PRICE CHANNELS ... Sometimes we techies can get carried away with technical indicators. That being the case, I thought I'd show you one of the simplest trend-following tools you can use. I wrote about the "four-week rule" in my first technical analysis book in 1987. I described it then as one of the simplest and most successful of all trading systems. That's still the case. You can find it under Price Channels on the Stockchart Overlay menu. The default value is 20 trading days which matches the original four-week time span. [The four-week rule was invented by Richard Donchian a legendary commodity trader]. The system is simplicity itself. Horizontal lines are drawn over the highest highs of the last twenty days and below the lowest lows of the same time period. A close outside one of those lines activates a trading signal. The last signal on the S&P 500 was a buy given on March 15 (green circle). Although the S&P subsequently fell to the lower channel, it didn't close beneath it. At the moment, the S&P is nearing the upper channel. In order to reverse the March buy signal, the S&P would have to fall beneath its mid-April low at 1280. That's a little over 2% from today's price. Shorter-term traders might feel that 2% is too much to give back if the market starts to weaken. In that case, the dashed line running through the middle of the two channels can act as a closer sell point. [Aggressive traders could even trade the crossing of that middle line for earlier signals in the direction of the major trend. The last upside crossing of the middle line took place on April 17]. You can vary the number of channel days to suit your trading style. A shorter-time span will give more frequent signals. A longer span will give less frequent ones. You can also apply the price channels to weekly and monthly charts. Chart 9 uses a 20-week channel. Several buy signals have been given since last November (green circle). No sell signals have been given. Price Channels are based in the premise that the market will keep rising until it turns down. You can't get much simpler than that.

Chart 8

Chart 9