ENERGY STOCKS SURGE AS WTI CRUDE FLATTENS -- WTIC TESTS SUPPORT ZONE -- BRENT CRUDE ETF SURGES TO NEW HIGH -- SHANGHAI AND HONG KONG SHARES SURGE -- COAL AND STEEL LEAD MATERIALS SECTOR
ENERGY STOCKS SURGE AS WTI CRUDE FLATTENS... Link for todays video. Energy stocks were strong on Monday as the Energy SPDR (XLE) recorded another 52-week high and the Oil Service HOLDRS (OIH) surged over 2%. This is all the more impressive considering that West Texas Intermediate ($WTIC) has been flat the last two months. There are two positives at work for these energy shares. First, stocks remain strong overall. Continued strength in stocks bodes well for the economy and oil demand. Second, even though West Texas Intermediate Crude is flat over the last two months, Brent Crude continues higher and surged above $100 today. Brent Crude is oil from the North Sea, which serves as the base for European demand. Most big oil companies are international with lots of non-US exposure. While US oil prices certainly influence their operations, oil sourced in the US is just one source of supply. Chart 1 shows the Energy SPDR (XLE) extending the relentless rise that began in late August. A move from 50 to 75 (+50%) is something a tech stock would be proud of. With a steady and steep advance, the Commodity Channel Index (CCI) moved into positive territory and has been positive since early September. Look for a move into negative territory for the first signs of weakening momentum. Chart 2 shows OIH with a similar pattern.
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Chart 1
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Chart 2
WTIC TESTS SUPPORT ZONE... Chart 3 shows West Texas Intermediate ($WTIC) within a rising trend overall, but resistance around 90 since early December. $WTIC hit resistance around 92 three times the last six weeks and declined to its support zone this month. The January lows and the lower pitchfork trendline mark support in the 85-88 area. Points 1,2 and 3 mark the starting points for Andrews pitchfork. The middle line starts at point one and bisects the line extending from points 2 and 3. These parallel lines combine to form a rising channel. A move below the support zone would break the channel and argue for lower prices. I am concerned with weakness in $WTIC because oil and stocks have moved together for a year now. Notice how $WTIC peaked before of the S&P 500 in April and bottomed ahead of the index in late May. $WTIC has yet to break down, but resistance has held at least twice and a breakdown could be negative for stocks.
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Chart 3
BRENT CRUDE ETF SURGES TO NEW HIGH... Chart 4 shows the Brent Crude ETF (BNO). Like the USO Oil Fund (USO), BNO uses futures contracts in an attempt to track the price of Brent Crude. Like USO, BNO is not a perfect tracker for Brent, but it can give us an idea of Brent performance. The Brent Crude ETF has been moving straight up since late August. West Texas Intermediate started hitting resistance at the end of December, but the Brent Crude ETF kept marching higher. Today, we see Brent hitting new highs for the move and West Texas Intermediate trading well below its January highs. Relative strength in Brent is reflected in the Price Relative ($WTIC:BNO ratio). Notice how this ratio took off in January and broke above its September high. The ratio moved higher in February as Brent continued to outperform.
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Chart 4
SHANGHAI AND HONG KONG SHARES SURGE... Last week I wrote about weakness in some key emerging markets, namely China, Brazil and India. Despite weakness in these three over the last few months the materials sector remains strong and copper is trading near 52-week highs. Also note that the German DAX Index ($DAX) and Australian All Ords Index ($AORD) are trading at 52-week highs and the Nikkei 225 ($NIKK) is trading at its highest level since early May. Except for these emerging markets, stocks remain strong on a global basis. While it is still too early to weigh in on India and Brazil, Chinese shares are showing strength as the Shanghai Composite ($SSEC) broke above its January high and the Hang Seng Index ($HSI) surged off support. Chart 5 shows the Shanghai Composite breaking above 2800 on Thursday and surging to 2900 today. As noted last Wednesday, the decline looked like a correction because of the retracement amount (62%) and the pattern (falling wedge). Chart 6 shows the Hang Seng hitting support from broken resistance and surging over 1% today. The index is weaker than the Shanghai Composite because it remains well below its January high.
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Chart 5
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Chart 6
COAL AND STEEL LEAD MATERIALS SECTOR... The Basic Materials SPDR (XLB) led the market higher with a 1+ percent gain and 52-week high. As noted above, materials were boosted by the surge in Chinese equities and the rebound in other emerging markets. Chart 7 shows XLB within a steep uptrend. The ETF took a hit in mid January, but quickly firmed and surged above its January high. Even though XLB is overbought and ripe for a correction, there are simply no signs of consistent selling pressure. MACD moved above zero in early September and has remained positive for over five months. A move into negative territory would provide the first sign of material weakness for momentum. Chart 8 shows the Coal Vectors ETF (KOL) bouncing off support from its late January lows. John Murphy featured this ETF way back on October 5th. Chart 9 shows the Steel ETF (SLX) breaking above its January-February highs with a close above 76 today. Despite relative weakness since early January, the ETF remains in a rising channel with support around 71.
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Chart 7
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Chart 8
