GASOLINE CHALLENGES 2006 HIGHS AS ENERGY SHARES RECOVER -- CRB INDEX, GOLD AND SILVER ARE TESTING 200-DAY AVERAGES -- THE DOLLAR IS BOUNCING OFF CHART SUPPORT
GASOLINE TESTS YEARLY HIGH ... One of the things the Fed will most likely be looking at today and tomorrow is the price of oil, gasoline, and most other commodities. They'll do that to get some clue as the future direction of inflation (and the economy). They won't get much comfort from energy prices. The first two charts show why. Chart 1 shows the continuous futures price of crude oil bouncing back up to $72 over the past week. That puts crude within three dollars of its all-time high. What's also impressive about the chart is the fact that the May/June price decline bounced off the January price peak near $69 (see arrows). The continuous futures chart of gasoline prices in Chart 2 is even more impressive. It shows gasoline testing its 2006 highs near 2.20 which is also the price peak hit in late September of last year (see arrow). Chart 2 looks more bullish than bearish. The fact that the driving season shifts into higher gear this coming July 4th weekend should give a boost to gasoline prices as well. Any upside breakout in energy prices can only serve to keep the Fed nervous about inflation. Energy shares have also held up pretty well.
Chart 1
Chart 2
ENERGY ETF REGAINS SOME UPSIDE LEADERSHIP ... A draw down in energy inventories reported today has also given a boost to energy shares. That comes after a week in which energy gained 5% in a bid to reclaim its 2006 role as the year's top sector. The daily bars in Chart 3 show the Energy Sector SPDR (XLE) trading at a three-week high after reclaiming its 200-day moving average (it also bounced off chart support at its early March low near 50). It's relative strength ratio has also started to climb and has broken a two-month down trendline. The XLE still needs to clear its 50-day line, however, to improve its short-term trend even more. As is usually the case, the direction of energy shares will be largely dependent on the direction of energy prices.
Chart 3
CRB INDEX STILL IN UPTREND ... The direction of commodity prices will also influence this week's Fed deliberations. From an inflation standpoint, the good news is that commodity prices have slid since May. The bad inflation news is that CRB uptrend is still intact. The next chart shows the CRB Index still trading above its 200-day moving average and well above its March low. The relative strength line beneath the price bars is a ratio of the CRB divided by the S&P 500. It shows that commodities as a group are still doing much better than the stock market. Although there is some linkage between the direction of commodity prices and the stock market (since they're both tied to the economy), I expect that commodities will continue to be the stronger asset class. Gold and silver have suffered heavy losses since over the last month. Charts 5 and 6, however, show both precious metals testing long-term support at their 200-day moving averages. I'm reluctant to make any new recommendations at this point in either commodity until we see how they react to the upcoming Fed move. A lot may ride on how the U.S. Dollar reacts to the Fed decision (and wording). It's been bouncing lately and has helped put downside pressure on precious metals and other commodities.
Chart 4
Chart 5
Chart 6
DOLLAR BOUNCES OFF CHART SUPPORT ... The weekly bars for the U.S. Dollar Index still hold out the possibility for a "head and shoulders" bottom in the making. The flat trendline drawn over the 2004-2005 tops near 92 qualifies as a potential "neckline". Three troughs are plainly visible. The middle trough formed at the start of 2005 at 80 qualifies as a possible "head". The two possible "shoulders" are marked by the green circles. The last time I showed this pattern I pointed out that a right shoulder should bounce off the same level as the left shoulder (near 84). And that's what's been happening over the last month. Not by a lot, but enough to keep the potentially bullish pattern alive. The 9-week RSI line has turned up from oversold territory under 30 and is testing resistance at the 50 level. The weekly MACD histogram bars have improved, but have yet to cross into bullish territory. Needless to say, the dollar is very influenced by Fed policy decisions. We're going to keep a close eye on the greenback. Its ultimate direction could have a big impact on the direction of commodity prices and inflation.
Chart 7
FED DECISION IS DUE TOMORROW ... The Fed is expected to raise interest rates another quarter point tomorrow (Thursday) afternoon to 5.25%. What it says along with that decision will be read very closely for clues about future Fed moves. It's hard to predict the immediate reaction of the markets to what the Fed may do or say. That's why I think it's important to keep our eyes on the major chart trends and not get too carried away with knee-jerk market reactions. My general view remains that the stock market will continue to deteriorate between now and the autumn. There's room for a short-term bounce however. That's partially due to a short-term oversold condition. And the tendency for the market to attempt a summer rally around the beginning of July. I'm inclined to treat any summer bounce as another selling opportunity. Those who are short the market, however, might want to consider some stoploss protection in case such a rally does materialize. Charts 8 and 9 show two bear funds that I recommended back in May (plotted through Tuesday). Both are still in uptrends. However, a close below the mid-June low at 19.95 in the SOPIX or 30.26 in the BRPIX would justify some profit-taking.
Chart 8
Chart 9
