DOW ATTEMPTS REBOUND OFF AUGUST LOW -- P&F CHARTS FOR THE DOW SHOW BUY AND SELL POINTS -- WEAKNESS IN OIL SHARES HINT AT OIL PEAK

DOW AND S&P 500 MAY ATTEMPT BOUNCE OFF AUGUST LOW ... The market's 10% drop since mid-October matches a similar decline during July and August. Although the market's long-term trend is now in doubt, there's a good chance for a rally attempt off the August low. The trick is determining exactly where that low is located. Chart 1 shows the Dow Industrials testing potential chart support around 12800. The mid-August intra-day low at 12517 is still 200 points below yesterday's close. I suspect, however, that prices will attempt to make a stand at current levels. There are two reasons for that. One is that the two August closes are closer to 12800. The other is the volume pattern. One of the ways to determine potential support below a market is to look for places were heavier trading took place. The heavy trading at the mid-August low marked an interim bottom. The horizontal volume bars on Chart 1, however, show the price levels where most of the trading took place [To plot horizontal volume bars, click on volume by price under Overlays menu]. The lowest volume bar is located around 12800. That means that very little trading took place around the August intra-day low. It also suggests that prices are already at chart support. The horizontal volume bars above the market show heavy trading near 13300 and 13500. That's where more resistance is likely to be seen on any rally attempt.

Chart 1

P&F CHARTS FOR THE DOW ... Chart 2 shows a traditional point & figure chart for the Dow (each box is worth 50 Dow points). Except for the whipsaw buy signal during September, it's done a pretty good job of tracking the Dow's short-term swings. The short-term trend in Chart 2 is down. However, a Dow close at 13050 or higher would reverse the last dip into new lows and could trigger a yearend rally attempt. A close at 13400 or higher, however, is needed to really improve the chart. Chart 3 uses a 1% box size for the Dow which is better for longer-term trend trading. The Dow sell signal given in Chart 3 at 13286 is still in effect. The Dow would have to close at 13963 or higher to reverse that sell signal.

Chart 2

Chart 3

DROP IN OIL STOCKS HINT AT OIL PEAK... Despite oil's recent rise near $100, oil shares haven't kept pace. Chart 4 shows the Energy SPDR (XLE) trading near a three-month low (and well below its 50-day average). The solid black line, however, shows oil prices continuing to climb (until today). That type of divergence between the shares and the commodity often signal a top in the latter. I suspect today's $3.00 drop in the price of oil may hinting at a short-term top in oil, and may also be lending some support to an oversold stock market.

Chart 4