RISING OIL WEIGHS ON DOLLAR AND AIRLINES -- BEARISH PATTERNS FOR SMH -- A TALE OF TWO GAPS -- IWM REMAINS STYMIED AT 80 -- BIOTECH HOLDRS SURGE -- DNA AND AMGN PUSH BBH HIGHER -- GILEAD BOUNCES OFF 200-DAY
OIL SURGES TO NEW HIGHS ... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The U.S. Energy department reported a drop in crude oil supplies and this sparked a rally in black gold. West Texas Intermediate Crude ($WTIC) moved above $79 today and this key commodity is challenging its July 2006 highs (and August 2007 highs). WTIC is up over 20% this year and oil is one of the top performing commodities for 2007. This advance hurt the U.S. Dollar Index ($DXY), which sank to new lows over the last two weeks, and helped the streetTRACKS Gold ETF (GLD), which surged above $70 this week. GLD is up over 10% this year and gold is riding oil's inflationary coattails. The combination of rising oil, strong gold and a weak U.S. Dollar Index points to inflationary pressures. Just how much will become clear when the Consumer Price Index (CPI) and Producer Price Index (PPI) are reported next week. In addition, the Fed will make its policy statement between these two reports and next week will be most interesting -- to say the least.
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RISING OIL GROUNDS AIRLINES... I featured the Dow Transports ($TRAN) last week and the negative affects of rising energy prices. Today, the Amex Airline Index ($XAL) came under fire and lost over 2%. The negative correlation between Airlines and West Texas Intermediate Crude ($WTIC) is hardly surprising. Fuel costs make up a significant portion of airline expenses. Airlines surged when oil fell from July 2006 until January 2007. Oil bottomed in January 2007 and this also marked a peak for the Airline Index. Oil surged over the last nine months and the Airline Index declined. I would not expect airlines to fly high until oil takes a hit and breaks below its August low. Don't hold your breath though. On the price chart, XAL remains in a clear and present downtrend. Broken support around 48 turned into resistance and this is the level to beat before expecting any kind of trend reversal.
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BEARISH PATTERNS FOR SMH... The Semiconductor HOLDRS (SMH) is running into resistance around 38 and weakness in this key sector could weigh on techs. SMH bounced off its 200-day moving average in mid August and surged back to its 50-day moving average. The ETF broke back above the 50-day for a few days, but fell back and this area is giving SMH trouble. There are two potentially bearish patterns to watch out for here. First, the ETF formed a rising flag after the Jul-Aug decline and this advance retraced 62% of the prior decline. Both the pattern and the retracement are typical for counter-trend rallies. Second, the ETF could be tracing out a head-and-shoulders reversal. The left shoulder formed in May, the head in July and the right shoulder is currently forming. The head-and-shoulders is still only potential and neckline support is around 35-36. A break below this support zone would confirm the pattern and project further weakness towards 30.
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MINDING THE GAPS... Those who have ridden the tube (subway) in London are familiar with "mind the gap". This refers to the gap between the train and the platform. There are also gaps in technical analysis and these refer to non-trading spaces on the price chart. Gaps usually occur on the open when prices start trading above or below the prior close. Most recently, the Nasdaq 100 (QQQQ) and Russell 2000 (IWM) gapped down last Friday after the employment report. These down gaps reflect an imbalance between buyers and sellers. There were too many sellers and buyers were not prepared to buy QQQQ and IWM near the previous close. Buyers had to be enticed with lower prices and this produced the gap down. While the gaps are important, it is also important what happens after the gap. QQQQ firmed around 48 and moved back to Thursday's high (6-Sep) to completely fill the gap. IWM, on the other hand, is having trouble at 78 and the gap is turning into resistance. IWM and small-caps are showing relative weakness over the last two days while QQQQ and big techs are showing relative strength.
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80 STILL TROUBLE FOR IWM... I noted last week that Point & Figure charts were great for identifying key support and resistance levels. The chart below shows the Russell 2000 (IWM) and the "scaling method" is percentage. IWM has been challenging resistance at 80.6 since August and failed at this level five times over the last six weeks. Also notice that this area acted as support earlier this year (green line) and broken support turned into resistance. I view the support break as bearish and it would take a move above the August highs to reverse this stance.
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BIOTECHS CONTINUE STRONG ... John Murphy and I have been showing biotech charts for the last couple of weeks and this group continues to show strength. Led by Genentech (DNA) and Amgen (AMGN), the Biotech HOLDRS (BBH) surged above their July highs over the last five days. Not many groups can make that claim. For example, the S&P 500 and Russell 2000 remain below their August highs and neither is close to its July high. In addition, all nine sector SPDRs remain below their July highs. Over the last five weeks, BBH is outperforming the broader market and the sector SPDRs. On the price chart, BBH moved above its 200-day moving average with the biggest 10-day move since 2005. The bottom window shows the 10-day Rate-of-Change and this indicator surged to its highest level since 2005. This surge tells us that the current move is not your "garden variety" advance. In fact, this type of surge often signals the start of an extended advance.
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GENETECH AND AMGEN SURGE... Genentech (DNA) and Amgen (AMGN) are the two biggest components of the Biotech HOLDRS (BBH). DNA surged above its 50-day moving average at the end of August and is now challenging its 200-day moving average. The surge occurred on above average volume and the stock broke above the July highs. Broken resistance from these highs turns into support around 77. AMGN gapped up with good volume in early September and then fell back last week. The stock resumed its advance this week with another surge on above average volume. This move carried the stock above its 50-day moving average and the next resistance zone is around 58-60.
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GILEAD BOUNCES OFF 200-DAY... Gilead Sciences (GILD) is another biotech stock that sprang to life over the last few weeks. The stock surged from January to May and then corrected over the summer. The correction retraced 62% of the prior advance and GILD found support near the 200-day moving average. How's that for a combination. But that's not all. The stock also formed a falling price channel over the last four months and is on the verge of a breakout. The retracement, pattern and return to the 200-day all point to a correction. Look for a break above the August highs to fully reverse this downtrend (correction) and start another leg up.
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