OIL MARKET SUFFERS DOWNSIDE REVERSAL DAY -- RISING BOND YIELDS COINCIDE WITH GOLD DROP
HEAVILY SELLING OF OVERBOUGHT OIL... Earlier today I wrote that energy was the only commodity group that hadn't yet entered into a downside correction. Today may be the day the oil correction finally started. Chart 1 shows the United States Oil Fund (USO) closing 3% lower after trading higher earlier in the day. Even more disturbing is the extremely heavy trading. That's a negative combination. A downside correction could drop at least to the 50-day average. The weekly bars in Chart 2 show a negative divergence forming from above the 70 level. That's also suggestive of a market in need of correcting. Finally, the monthly bars in Chart 3 show that the 14-month RSI line has moved into overbought territory over 70 for only the third time in the last eight years. That's a sign of a market that's come too far too fast.

Chart 1

Chart 2

Chart 3
RISING BOND YIELDS PUSH GOLD LOWER ... Gold prices fell heavily again today. Chart 4 shows the streetTracks Gold Trust falling the equivalent of $25 and headed toward its early May low and its 200-day moving average. Earlier today, I suggested that rising bond yields were causing most of the commodity selling. To make that point even clearer, the green line on top of Chart 4 is the 10-Year T-Note Yield which broke out to a new 2008 high today. You can see that the bottom in bond yields in mid-March marked the start of the downside correction in gold. The thinking is that rising bond yields boost the dollar. With every other commodity group in the midst of a downside correction, it was just a matter of time until oil finally succumbed to profit-taking. [Today's upside breakout in bond yields coincided with a 10 point drop in the CRB Index. Virtually all commodity prices fell sharply today]. Basic material, gold, and energy shares were the day's weakest stock groups. Stocks managed a modest bounce today on moderate volume. It remains to be seen if today's breakout in bond yields and the drop in oil are enough to push the S&P 500 through its 200-day moving averages (see Chart 5).

Chart 4

Chart 5