GOLD AND ENERGY STOCKS ARE BOUNCING OFF CHART SUPPORT AS DOW TESTS MAY HIGH

ENERGY STOCKS BOUNCE OFF 2006 LOWS... Over the last couple of months, energy stocks have gone from one of the market's strongest groups to one of the weakest. At the same time, energy prices have fallen sharply. Charts 1 and 2 show, however, that both markets are attempting to bounce from chart support levels. Chart 1 shows the Energy Sector SPDR (XLE) bouncing off its March and June lows near 50. At the same time, crude oil is finding some chart support at its spring low near $60. That level may also provide some psychological support to crude. The Commodity Channel Index (CCI) below Chart 2 shows that crude is in a deeply oversold condition as well.

Chart 1

Chart 2

XAU INDEX IS BOUNCING OFF CHART SUPPORT ... Precious metal stocks, which have been trading in tandem with energy stocks, are also attempting to bounce off 2006 chart support. Chart 3 shows the PHLX Gold & Silver (XAU) Index starting to bounce off its March/June lows near 120. At the same time, bullion is still trading above its summer low near $542. Chart 5 shows silver trying to find support around its 200-day moving average. Today's commodity bounce comes at a crucial time for the rest of the market. That's because the recent stock rally started with the commodity slide that started during August.

Chart 3

Chart 4

Chart 5

OIL DROP HAS FUELED DOW GAIN ... Chart 6 overlays the price of crude oil (black line) over the Dow since February. The chart shows that the July bottom in the Dow coincided with a July peak in crude. At the moment, both are at important chart points. Crude is testing potential chart support at $60 (and oil stocks are testing their summer lows). At the same time, the Dow is challenging its May peak. Any rally attempt by the energy patch from current levels might cause some nervous profit-taking as the Dow tests that potential resistance barrier.

Chart 6