CRUDE OIL MAY FIND SUPPORT AT $40 -- FALLING COMMODITIES ARE HURTING CANADA -- A FALLING CANADIAN DOLLAR HAS HURT CANADIAN ISHARES -- AN UPDATE OF EMA MACD LINES ON DAILY, WEEKLY, AND MONTHLY CHARTS -- USING INTRA-DAY EMA SIGNALS FOR SHORT-TERM TRADING

$40 WAS THE PREVIOUS OIL CEILING ... With crude oil having fallen $100 from its summer peak, and trading back below $50, the big question is whether there exists some price level that could stem the oil plunge and act as a possible floor beneath that market. My best guess is that such a level would be at $40. Chart 1 gives a clue why. One of the basic premises of chart analysis is that a previous resistance level, once broken, usually acts as new support level below the market. In other words, previous ceilings become new floors. The monthly bars in Chart 1 plot the price history of crude since 1990. The flat line shows that $40 acted as a ceiling during 1990 and again during 2000 and 2002. [Crude also peaked at $40 in 1980 at the end of the commodity boom of the 1970s]. That's why crude's rise above $40 during 2004 was so significant because it represented a historic breakout through a resistance barrier that had never been exceeded before. Given the historic importance of the $40 level, I believe that it's a logical spot for new support to materialize in the oil market. Crude fell below the $45 level in today's trading.

Chart 1

FALLING COMMODITIES ARE HURTING CANADA ... One of our Canadian readers asked for an analyis of that market. To do that justice requires commenting not just on Canadian stocks, but on the direction of commodities and the Canadian Dollar. Because Canada is a big producer of natural resources, its fortune are closely tied to commodities prices and currencies. I'll explain why. Chart 2 shows the S&P/Toronto Composite Index losing nearly half of its value during 2008. The chart also shows the TSE testing a sixteen-year support drawn under the 1992/2002 lows. The monthly RSI line (below chart) also shows the TSE to be in oversold territory below 30. The line on top of Chart 2 is a ratio of the TSE to the SPX and shows that Canada did much better than the US from 2000 until the middle of 2008. Since this summer, Canada has done much worse. Two factors contributed to Canadian selling -- a falling Canadian Dollar (a rising U.S. Dollar) and falling commodities.

Chart 2

FALLING COMMODITIES HURT CANADA... The middle line in Chart 3 is a ratio of the Toronto Index (TSE) divided by the S&P 500 (SPX). That relative strength ratio shows that Canada held up much better than the U.S. until the middle of this year. Starting in July, Canadian stocks started falling faster than the U.S. The main reason why is seen the black line on top of Chart 3 which the CRB Commodity Index. Canada started underperforming as soon as commodities started to tumble at midyear (see vertical line). And that's still the case. Another reason Canadian stocks started to underperform was the plunge in the Canadian Dollar. The green line below Chart 3 shows the CDW trading sideways during the first half of 2008 before dropping during the second half. That's of course tied to the rally in the U.S. Dollar which also helped push commodities low.

Chart 3

DOUBLE TOP IN EWC CAUSED BY WEAK CDW... Although the next chart may not have any relevance to Canadians, it helps explain to American investors the impact that currency trends have on the performance of foreign ETFs. Although the Toronto Index hit a record high during 2008, Canadian iShares didn't. Chart 4 shows the EWC forming a huge "double top" from late 2007 to mid 2008. The main reason why the EWC underperformed the TSE this year was the falling Canadian Dollar. The green line below Chart 4 shows the "loonie" peaking in November 2007, trading sideways until mid 2008, and tumbling during the second half. The blue line below that is the EWC/TSE ratio. Notice that the two bottom lines look identical. Here's why. While foreign stocks are quoted in their local currency, foreign ETFs traded in the U.S. are quoted in U.S. Dollars. When the U.S. Dollar is rising (as it's been since midyear), ETFs quoted in the stronger U.S. currency will fall faster than a foreign stock market quoted in its weaker local currency. In other words, a weak Canadian Dollar will cause Canada iShares to fall faster than the Toronto Index. That explains why foreign stock ETFs (with the exception of Japan) have fallen faster than their cash stock markets this year.

Chart 4

USING EMA LINES ON THE MACD... Following my recent message on using MACD lines to measure different degrees of trend, one of our readers asked me to do the same using the 13-34 period EMA combination. As you probably know, I'm a big fan of that moving average combination. Bullish and bearish signals are given when the shorter (13 EMA) crosses above and below the longer (34 EMA). The same numbers are used on daily, weekly, and monthly charts. You can monitor the spread between the two EMAs by inserting 13,34,1 into the MACD indicator. The daily bars in Chart 5 show the "short-term" trend for the S&P 500. Short-term buy and sell signals are given when the spread line crosses above and below its zero line. The last bearish crossing took place in early June (first arrow). Although the daily spread has narrowed a bit over the last two weeks, no short-term buy signal has been given. [Although a price close above the 34-day EMA (red line) is a sign of strength, no signal takes place until the 13-day EMA (blue line) crosses above the 34-day EMA]. The weekly bars in Chart 6 show a major sell signal given at the end of last year (see arrow). With the spread between the two EMAs still dropping (black line), there's no sign of improvement on the weekly chart.

Chart 5

Chart 6

MONTHLY LINES STILL DROPPING ... I've explained before that monthly crossover signals usually take place well after a trend has started. Chart 7 shows that crossings of the zero line by the monthly EMA spread is a late indicator. That's why I place more important on the "direction" of the line that measures the difference between the 13- and 34-month EMAs. I've overlaid that line on the monthly S&P 500 bars since 1995. Only three major turns have taken place during that time -- a downturn in 2000, an upturn in 2003, and a downturn late last year. As of now, the monthly spread line is still dropping. It's doubtful that any significant market upmove will take place while the monthly spread line is falling.

Chart 7

USING EMA LINES ON INTRA-DAY CHARTS... A number of readers have asked if there are any tools to help with very short-term timing signals. Most technical indicators lend themselves to short-term trading, but you have to use intra-day charts to see them. I've been asked if the 13- and 34-EMA combination can be applied to intra-day charts. Although I haven't done an exhaustive study on their application to intra-day charts, I suspect they can be used there as well. Chart 8 plots "hourly" price bars for the S&P 500 for the last six weeks. The blue and red lines are the 13- and 34- "hour" EMA lines. The black line plots the spread between the two hourly EMAs. I've marked off three short-term signals since Halloween week (see vertical lines) -- a short-term buy on October 29, a short-term sell on November 6, and a short-term buy on November 24. Those signals are seen more clearly when the black line crosses above and below its zero line. The hourly lines are still positive but are narrowing. Faster signals might be given by turns in the spread line itself. Intra-day charts are meant for very short-term trading (or day trading). I don't advise their use by intermediate or longer-term investors. Keep in mind also that the profitability of short-term trades is greatly influenced by the long-term direction of the market which is still down. Until that changes, short-term sell signals will probably work better than short-term buy signals.

Chart 8