ANOTHER OIL DROP BOOSTS MARKET -- ENERGY SPDR BREAKS 200-DAY LINE -- FINANCIALS AND CONSUMER DISCRETIONARY STOCKS LEAD REBOUND -- NASDAQ AND RUSSELL 2000 BOUNCE OFF MARCH LOWS -- MOVING AVERAGE TREND IS STILL DOWN BUT IMPROVING

CRUDE OIL BREAKS SUPPORT... On Tuesday I suggested that the downside correction in energy shares warned of possible weakening in the price of crude. The drop in energy shares became more serious today. So did the drop in crude. Crude oil fell another $4.91 (-3.6%) today. Chart 1 shows the United States Oil EFT (USO) closing below its 50-day average for the first time in five months. Downside volume over the past three days has also been heavy. That's a bearish combination. Daily RSI and MACD lines have also turned down. Chart 2 shows the Energy SPDR (XLE) falling decisively below its 200-day line today. And on heavy downside volume. The XLE has also broken chart support along its late February peak. Energy shares have gone from the market's strongest group to the weakest, as shown by its falling relative strength line (bottom of Chart 2). Bad news for energy shares has been good news for the rest of the market. Especially financials and consumer discretionary stocks.

Chart 1

Chart 2

FINANCIALS LEAD MARKET HIGHER ... My Tuesday Market Message pointed out that after energy stocks peak, the first sign of a potential market bottom is money moving back into consumer discretionary stocks and financials. Not coincidentally, those two groups have led the market rebound over the last two days. Chart 3 shows the Financials SPDR gaining another 4% today and on very heavy volume. Daily RSI and MACD lines have turned positive as well. As Arthur Hill pointed out yesterday, however, the XLF still needs to clear its March lows around 23 and its 50-day moving average to signal that the current rebound has some legs. It's too soon to call this a major market bottom. But the market has taken a turn for the better.

Chart 3

NASDAQ AND SMALL CAPS BOUNCE OFF MARCH LOWS... Arthur Hill also pointed out that the Nasdaq Composite and Russell 2000 Small Cap Indexes were bouncing off their March lows. That's also encouraging for a number of reasons. Bounces off previous lows is how bottoms start. Market bottoms are also characterized by upside leadership by small caps and technology. Here again, it's too soon to call either chart a bottom. But the short-term picture has improved.

Chart 4

Chart 5

MOVING AVERAGE TREND IS STILL DOWN ... At times like these, it's a good idea to check and see if moving average trends have changed. So far, they haven't. Chart 6 overlays the 13 and 34-day EMAs on the S&P 500. A sell signal was given six weeks ago when the blue line crossed below the red. For that signal to be reversed, the blue line has to cross back over the red. They're a long way from doing that. The good news, however, is that the S&P has crossed back over the 13-day EMA (blue line) for the first time since early June. And the spread between the two EMAs (bottom of chart) has started to narrow. So far, all that tells us is that the short-term trend is improving. That's about all we can say at this point. Also, that energy shares are looking toppy and financials more stable.

Chart 6