DOW STALLS AFTER SHARP DECLINE - BONDS LEAD INTERMARKET PLAYERS - WEAK DOLLAR NOT MUCH HELP FOR OIL - ENERGY SECTOR SHOWS RELATIVE WEAKNESS - MACD TURNS NEGATIVE FOR USO

STOCKS EDGE HIGHER... Link for todays video. Stocks edged higher ahead of Fridays employment report and three day weekend. Chart 1 shows the Dow Industrials gaining around 64 points, which is a relatively small move (+.69%). After a long red candlestick and sharp decline on Tuesday, the Dow stalled with small moves on Wednesday and Thursday. Looking back, recent price action appears similar to what we saw in mid June when the Dow declined sharply for two days, stalled for three days and then continued lower (yellow highlight). Also notice that CCI broke into negative territory in mid June. This weakness foreshadowed the last correction. After a sharp decline earlier this week, the Dow has now stalled for two days and CCI broke into negative territory. Short-term momentum is bearish as long as CCI holds in negative territory. A break below todays low would argue for another push lower.

Chart 1

BONDS LEAD AS OIL LAGS... Chart 2 shows the Intermarket PerfChart over the last 60 days. Relative strength in bonds is the first thing that jumps out. Performance for the 20+ Year Treasury ETF (TLT) has been positive the entire time (60 days). Moreover, notice that the blue line (TLT) is at its highest level of the last 60 days. In contrast to bonds, oil is the weakest of the intermarket players. Except for a brief positive blip in early June, performance for the US Oil Fund ETF (USO) has been negative since mid June. While bonds are up over 10%, oil is down over 10%. Could this be a sign of deflation? For one reason or another, money is clearly moving into bonds. It could be deflationary pressures, slower economic growth or a flight to safety. It is also interesting to note that oil moved lower as the US Dollar also moved lower. Oil usually benefits from weakness in the Dollar. The green line shows the Dollar Bullish ETF (UUP) working its way lower from mid June to early September.

Chart 2

As noted in Wednesdays market message, the Gold ETF (GLD) broke triangle resistance with a big move. On the PerfChart, GLD performance (pink) bottomed in mid August and surged over the last 2-3 weeks. In fact, GLD performance is at its highest level of the last 60 days. This means that both bonds and gold are peak performers right now. It is a strange combination that could prove detrimental for stocks. Gold could also be attracting money as a safe haven.

ENERGY SECTOR LAGS... With oil the weakest intermarket player, it is little surprise that the Energy SPDR (XLE) is the weakest of the nine sectors. Chart 3 shows 60-day performance for these nine sectors and the S&P 500 (red line). Sectors above the red line are leading the market, while sectors below the red line are lagging the market. Of the nine sectors, energy is the only one sporting a loss over the last 60 days. In fact, XLE performance has been negative the entire 60 days. Relative weakness is clearly not a good sign for a sector.

Chart 3

The black dotted line on chart 3 marks the late August peak in the S&P 500. The Financials SPDR (brown line) remains the top performing sector, but XLF took a rather hard hit the last few days. Chart 4 shows the Sector SPDR Perfchart over the last five days. Notice that the finance sector led the most recent decline. The consumer discretionary, industrials and energy sectors were also relatively weak over the last five days. It is also worth noting that ALL nine sectors were down over the last five days. This indicates broad selling pressure across all sectors.

Chart 4

MACD TURNS NEGATIVE FOR USO... Chart 5 shows the US Oil Fund ETF (USO) with MACD. On the price chart, the ETF hit resistance around 38-39 and broke the July trendline with a sharp decline this week. USO is currently testing support from the mid August low around 35. In the indicator window, MACD formed a slight negative divergence in August and moved into negative territory this week. With momentum now negative and a trendline break, the bearish evidence is stacking up. A move below the mid August low would complete the trend reversal.

Chart 5

Chart 6 shows weekly candlesticks for West Texas Intermediate ($WTIC). After a gut-wrenching decline, $WTIC retraced almost 38% with a rally back above 70. Given the severity of the decline, I would consider the February-August advance to be a counter-trend move. In other words, it is a bear market rally. With oil meeting resistance in the mid 70s and MACD (5,35,5) crossing below its signal line, a continuation of this bear market could start soon.

Chart 6

Education Note: I adjusted MACD because this is a weekly chart and I wanted a more sensitive indicator. The shorter moving average is faster because it is even shorter (5 vs 12). The longer moving average is slower because it is even longer (35 vs 26). Although it is hard to see the signal line crossover, the actual numbers confirm that MACD (4.78) is below its signal line (4.91). In addition, the histogram moved into negative territory (-.126). The histogram plots the difference between MACD and its signal line. Chart 7 shows both versions of MACD. The green dotted line shows MACD (5,35,5) crossing above its signal line before MACD (12,26,9).

Chart 7