STOCKS REBOUND FROM FROM OVERSOLD CONDITION -- COMMODITIES REMAIN WEAK -- ENERGY PRICES DECLINE
S&P 500 ENDS THREE-WEEK DECLINE... Stocks are ending the week on a strong note after falling for the previous three weeks. An oversold condition and the presence of underlying chart support are also playing a role in this week's buying. The 9-day RSI line in the upper box in Chart 1 is bouncing from oversold territory below 30 for the first time in three months. In addition, the chart shows the SPX bouncing off its 62% Fibonacci retracement line measured from its June bottom to its August top. That positive combination has helped push the SPX back above its 50-day moving average which also strengthens its short-term trend. Having said that, the SPX remains well below its falling 200-day moving average (red arrow) which measures the market's long term trend and which remains bearish. Until that situation changes, technical odds favor this week's stock rebound being a short-term rebound in a larger downtrend.
FIBONACCI RESISTANCE... The horizontal lines in Chart 2 show overhead Fibonacci lines measured from the August high to this week's low which show where the market's rebound could run into new selling. The most important of the three lines is the upper 62% retracement line. A price move above that upper line would signal a more substantial rally.
COMMODITIES REMAIN IN DOWNTREND... With all the attention on the direction of inflation, it's worth keeping an eye on the direction of commodity prices. That's because commodity prices often act as a leading indicator of inflation at the producer and consumer levels. And the current trend is down. The daily bars in Chart 3 show the S&P GSCI Commodity Index having fallen to the lowest level in seven months. There's good and bad news in that lower trend. The good news is that falling commodity prices suggest that inflation may actually be peaking. The bad news is that commodity prices have a history of peaking in the early stages of a recession after the Fed starts raising interest rates. A strong dollar may also be putting downward pressure on commodity prices.
A LOOK AT THREE ENERGY MARKETS... Energy prices play a major role in the direction of commodity prices and inflation in general. And the news may be encouraging. In order to get a better read on that trend, however, it's necessary to look at the individual components within the energy patch. Chart 4 shows the United States Oil Fund falling below its 200-day moving average this week before rebounding sharply on Friday. The USO has fallen -27% since June. Chart 5 shows the United States Gasoline Fund falling below its 200-day average to the lowest level since February having lost -37% of its value. That's good news for drivers. A lot of attention is also being paid to the trend of natural gas. Chart 6 shows the United States Natural Gas Fund pulling back over the last month but remaining above its 50-day moving average. So far, the price of natural gas has held up better than other parts of the energy complex. Shortages of nat gas in Europe have already pushed its price sharply higher there. It remains to be seen if that does the same to prices here.
