OIL BREAKS TO NEW HIGHS -- UPS GAPS DOWN -- FEDEX AND JB HUNT FOLLOW LOWER -- DOW TRANSPORTS HITS RESISTANCE -- XLY BACKS OFF FEBRUARY HIGHS -- RTH AND XRT FAIL AT RESISTANCE
OIL SURGES TO NEW HIGHS... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor
The government reported a decline in crude inventories and this news sent the United States Oil Fund ETF (USO) to new highs. This report may have sparked today's move, but a new high is not that surprising given the strong uptrend in oil. After breaking resistance in February, USO consolidated and broken resistance turned into support. Chart 1 shows the ETF successfully testing support around 79-80 in late March and early April. With a gap up on Monday and a strong gain today, USO moved to a new high to affirm the current uptrend. This move also reinforces support around 79-80. The bulls are in good shape as long as this level holds.
Chart 1
UPS WARNING HITS TRANSPORTS... United Parcel Service (UPS) tumbled sharply after the company guided lower today. UPS cited weakness in the economy and rising fuel cost for the earnings miss. With oil surging to a new high today, it looks like rising fuel costs are not going away anytime soon. This warning presents a two-fold problem that other companies may be facing. First, weakness in the economy reduces demand for its services, which translates into declining revenues. Second, rising fuel costs increase expenses, which affects the profit margin. UPS, which broke flag resistance in late March, gapped down and moved below 72 today (Chart 2). This negates the flag breakout. With a ton of resistance around 75-77, this gap should be considered a bearish breakaway gap until proved otherwise (filled).
Chart 2
FEDEX AND JB HUNT FOLLOW SUIT... Unsurprisingly, a number of key stocks within the Dow Transports took hits as a result of the UPS warning. FedEx (FDX), which competes directly with UPS, met resistance at its 200-day moving average and declined sharply the last few days (Chart 3). The advance to 100 also represents a 50% retracement of the July-January decline. The big trend still looks down as the 50-day moving average trades below the 200-day moving average and the 200-day moving average falls. As such, the January-April advance could be considered a corrective advance or counter-trend rally. In Elliott Wave terms, it could be an ABC correction with the recent high marking the end of wave C.
Chart 3
Chart 4 shows JB Hunt (JBHT), which is part of the red-hot trucking group. In the face of rising oil prices and a weakening economy, the stock broke above resistance in January and moved to new highs in March. Talk about a strong will. The January breakout is still holding, but the stock took a big hit on Wednesday (-6%). As the biggest decline since early January, there is likely to be some downside follow-through. The March lows and the 200-day moving average mark support around 27-28.
Chart 4
DOW TRANSPORTS HITS RESISTANCE... The Dow Transports met resistance from its old nemesis (5000) and declined sharply on Wednesday. Led by truckers and rails, the Dow Jones Transportation Average ($TRAN) led the stock market in 2008. After breaking above its 200-day moving average in March, the Average hit its resistance zone around 5000 in early April. Today's sharp decline reinforces resistance in this area. It is possible that there is a big inverse head-and-shoulders pattern working from November to April. The blue trend line marks neckline resistance. The Average broke both the trend line and the 200-day moving average around 4800. If this pattern is indeed valid, then the Average should firm soon and break above the resistance zone at 5000.
Chart 5
XLY HITS RESISTANCE WALL... The downtrend in the Consumer Discretionary SPDR (XLY) may have stalled over the last two months, but the ETF has yet to gain any serious upside traction (Chart 6). With the 50-day moving average below the 200-day moving average and a falling 200-day moving average, the big trend for XLY is clearly down. This downtrend stalled in 2008 after XLY found support around 29 in January and again in March. Despite a nice bounce in March, the ETF hit resistance from its February highs and has yet to forge a breakout. From early February to early April, there are four reaction highs between 32 and 33. XLY needs to break 33 before we can take the bulls seriously. Until then, flat trading over the last few months is just a consolidation within a bigger downtrend.
Chart 6
RETAIL ETFS ON THE DEFENSIVE... The Retail HOLDRS (RTH) and the Retail SPDR (XRT) also met resistance last week and pulled back rather sharply the last five days. Charts 7 and 8 show that RTH and XRT are both in long-term downtrends. Their 50-day moving averages are below their 200-day moving averages and the 200-day MA's are falling. RTH met resistance from the February-March highs and the 200-day moving average. XRT also met resistance from the February-March highs. Actually, XRT formed lower highs from February to early April. A triangle consolidation is taking shape and this looks like one big consolidation within a downtrend. Both ETFs need to break above their respective resistance zones before we can take the bullish case seriously.
Chart 7
Chart 8
