STOCKS CLOSE WEAK -- NASDAQ STAYS OVERSOLD -- ENERGY STOCKS SHOW SOME STRENGTH -- CONOCOPHILIPS AND BJ SERVICES LEAD -- SURGE IN OIL FUELS ENERGY GROUP -- AIRLINES GROUNDED WITH RISING OIL PRICES
LATE SELLING PUSHES STOCKS LOWER... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
A wave of selling pressure hit the market this afternoon and the major indices closed lower. Even though the declines were modest, the inability to hold gains shows the fragility of this oversold bounce. The Nasdaq composite led the afternoon retreat and closed down around 1/2%. On the price chart, the Nasdaq formed an inverted hammer on Monday and surged on Tuesday. This inverted hammer is a bullish candlestick reversal pattern that requires confirmation. Tuesday's advance confirmed this short-term reversal, but the going got tough immediately with a modest decline today. This can be attributed to broken support around 2400, which turns into resistance. Even though a move back above broken support would provide a small victory for the bulls, I would expect resistance around the 50-day moving average.
Chart 1
Chart 2
OVERSOLD AND STAYING OVERSOLD ... Keep in mind that securities can become oversold and remain oversold. The Nasdaq became oversold last week and the Stochastic Oscillator shows that it remains oversold. This indicator becomes oversold below 20 and overbought above 80. It moved below 20 last week (oversold) and remains below 20. This means that the Nasdaq is both oversold and still weak. A move back above 20 would alleviate this oversold condition and call for a bounce in the index. This occurred in late January and late February (green circles). It has yet to occur here in early March and further weakness can be expected as long as the Stochastic Oscillator remains below 20.
Chart 3
ENERGY STOCKS TAKE THE LEAD... Energy stocks were stand out performers on Wednesday with the Energy SPDR (XLE) advancing over 1% and the Oil Service HOLDRS (OIH) surging over 2%. Both XLE and OIH were up even more, but they also succumbed to afternoon selling pressure and closed off their highs for the day. XLE closed right near its 50-day moving average and today's bounce reinforces support at 55. OIH found support around 132 over the last few weeks and surged on good volume today. The move was enough to close above the 50-day moving average and reinforce support around 132. As with XLE, I would like to see some follow through and a stronger close before turning bullish on OIH.
Chart 4
Chart 5
ConocoPhilips (COP) led the Energy sector with an intraday move above last week's high. However, COP was not immune to afternoon selling pressure and fell back by the close. COP found support from its 50-day moving average around 64 last week and broke above its 200-day moving average today. The weak close is disconcerting though and I would like to see follow through before taking this bounce seriously. The move reinforces support at 64 and this is the level to watch for signs of a breakdown.
Chart 6
BJ Services (BJS) led the Oil Services group with a high volume surge off support. The stock declined sharply in December and found support around 25.5 in early January. There was another move lower in February, but the stock found support around 25.5 again in early March. The high volume surge over the last two days validates support here and the stock moved above its 50-day moving average with some power today. In contrast to most of the market, BJS held up quite well in the afternoon and closed near its high for the day.
Chart 7
STRONG OIL BEHIND THE MOVE IN ENERGY ... The U.S. Oil Fund ETF (USO) surged almost 2% on Wednesday and this fueled the bounce in energy related stocks. Data from the Energy Information Administration (EIA) showed that oil stockpiles declined for the first time in three weeks and gasoline inventories also fell. The unexpected decline in these supplies sparked the oil bulls into action and prices moved sharply higher. USO has been trending higher since mid January and is entering a resistance zone in the low 50s. This resistance zone stems from the October-December consolidation. The ETF broke back above its 50-day moving average two weeks ago and the breakout is holding. Despite resistance ahead, the bulls clearly have the upper hand as long as USO holds above its 50-day.
Chart 8
Chart 9
AIRLINE INDEX TESTING 200-DAY... Not surprisingly, the Amex Airline Index ($XAL) has been moving counter to the U.S. Oil Fund ETF (USO). While USO bottomed in mid January and moved higher, XAL peaked in mid January and moved sharply lover. The index broke consolidation support at 58 two weeks ago and is now testing support from its 200-day moving average. With the broader market breaking down last week, airline stocks could get hit with a double whammy. Further weakness in the stock market could be a prelude to weakness in the economy and this would weigh on economically sensitive airlines.
Chart 10
Chart 11
