ENERGY SECTOR LEADS HIGHER - ALCOA POWER MATERIALS SECTOR - FILLED VERSUS HOLLOW CANDLESTICKS - PRECIOUS METALS LEAD COMMODITY GROUPS - INDUSTRIAL METALS AND ENERGY INDICES REMAIN RANGE BOUND

ENERGY STOCKS SURGE... Video Link (click here) With oil moving back above $70, energy stocks advanced sharply and led all sectors on Thursday. Chart 1 shows the Energy SPDR (XLE) challenging its September high. After a pullback in late September, XLE found support near the early September gap and surged above 56 with another gap this week. First support is set at the October low. Medium-term support is set with the August-September lows. The energy sector is up over 7% this week and the best performing sector in the S&P 500. As the third biggest sector, this weeks gain accounts for a nice portion of the S&P 500 advance. Chart 2 shows the Oil Service HOLDRs (OIH) surging above 120 today and recording a new 52-week high.

Chart 1

Chart 2

OIL ETF EXTENDS BOUNCE... Chart 3 shows the US Oil Fund ETF (USO) jumping over 2% on Thursday. Despite this jump, USO remains within a large triangle formation, which represents a consolidation after the March-June advance. Even though USO has been stuck between 33 and 39 since August, the big trend is still considered up. West Texas Intermediate ($WTIC) has been stuck between 65 and 75 since August. A break above triangle resistance would trigger a bullish resolution to this triangle. Conversely, a break below the September lows would be bearish.

Chart 3

ALCOA LEADS MATERIALS SECTOR HIGHER... The Materials SPDR (XLB) sector was also in the spotlight as Alcoa surged on big volume. Chart 4 shows XLB within a clear uptrend since March. Yes, the move looks like a big rising wedge, which is typical for a bear market rally. However, the trend is most definitely up. I am basing key support on the August-September lows around 28.5. After a pullback towards support last week, XLB surged above channel resistance this week. This move affirms support and the current uptrend. Chart 5 shows Alcoa (AA) breaking flag resistance with a gap on Tuesday and exceeding 15 today. The stock sold off after a strong open though and formed a filled black candlestick on the day.

Chart 4

Chart 5

CANDLESTICK PRIMER:... Candlesticks are either red or black and filled or hollow. A red candlestick forms when the close is below the prior close. A black candlestick forms when the close is above the prior close. A filled candlestick forms when the close is below the open. A hollow candlestick forms when the close is above the open. With these four variables, there are four possible candlesticks. One: A filled black candlestick forms when the close is below the open AND above the prior close. Two: A hollow black candlestick forms when the close is above the open AND above the prior close. Three: A filled red candlestick forms when the close is below the open AND below the prior close. Four: A hollow red candlestick forms when the close is above the open AND below the prior close.

PRECIOUS METALS GO IT ALONE... While the recent move in gold is most impressive, it is interesting to note that other commodity groups are not following precious metals higher. PerfChart 6 shows performance for the Goldman Sachs commodity-related indices over the last two months. The Precious Metals Index is almost 10%, but the CRB Index ($CRB), the GS Energy Index ($GJX), the GS Livestock Index ($GVX) and the GS Industrial Metals Index ($GYX) are all down over this timeframe. The GS Agriculture Index ($GKX) is the only other commodity related index that is actually up. It is a bit strange that gold and precious metals are going it alone.

Chart 6

Perfchart 7 shows these same commodity indices with the US Dollar Index ($USD) and the S&P 500 over the last two months. Instead of a line performance chart, I am just showing ending performance in histogram format. Even though the US Dollar Index ($USD) is down over 3% and stocks are up over 4%, the economic related commodity indices are down. A falling Dollar and rising stock market should be bullish for energy, industrial metals and the CRB Index. The inability of these commodity groups to rise in the face of good news shows underlying weakness. Over the last two months, there has been a disconnect between these economic-related commodities and the stock market. A rising stock market should be bullish for the economy and increase demand for these commodities. Increased demand should push commodity prices higher. Lets look at the individual charts.

Chart 7

ENERGY INDEX FORMS TRIANGLE... Even though the GS Energy Index ($GJX) and GS Industrial Metals Index ($GYX) have not followed the stock market higher the last two months, both charts remain bullish overall with consolidation patterns forming. Perhaps these indices just got ahead of themselves and needed to rest. Chart 8 shows the GS Energy Index within a clear uptrend. After a move from 140 to 240, a triangle consolidation formed over the last few weeks. Actually, the index has been consolidating since it first hit resistance in June. A break above triangle resistance and the August highs would signal a continuation of the uptrend. With stocks trending up and the Dollar down, the odds favor an upside breakout. It would take a break below the September lows to reverse this uptrend and turn bearish.

Chart 8

The bottom window shows the GS Energy Index with the S&P 500 (red) and the US Dollar Index (green). Notice that the Energy Index bottomed in mid February, a few weeks earlier than the S&P 500. While the Energy Index could be peaking ahead of the S&P 500 now, we have yet to see key support breaks in either the Energy Index or the S&P 500.

INDUSTRIALS INDEX CONSOLIDATES... Chart 9 shows the GS Industrial Metals Index ($GYX) within a clear uptrend as well. After advancing over 70% from its March lows, the index formed a flag-like consolidation over the last two months. I am not calling it a flag because flags are usually shorter in duration. Nevertheless, a consolidation within an uptrend favors the bulls and an upside breakout. The index tested its August lows in September and early October, but managed to hold. As with the Energy Index above, look for a clean break below these lows to reverse the uptrend. The bottom window also shows the Industrial Metals Index bottoming ahead of the S&P 500 earlier this year (blue arrows).

Chart 9