Stocks & Oil, Sat Jun 18th, 2005
Both the stock market and oil prices rallied recently, which seems to be a paradox, because high oil prices are negative for earnings (i.e. a higher production cost and a higher consumer tax). However, the stock market was worried about another "soft patch," of slower economic growth, and the sharp rise in oil prices suggest the U.S. economy is still expanding at above trend growth.
The two charts below are same period daily charts of SPX and OIH. The short-term technical indicators suggest SPX is near a top, e.g. VIX closing at a multi-year low, VXN closing at an all-time low, and the NYSE Oscillator's 20 day MA at an extreme level. Also, Nasdaq closed at 2,090 Fri, and 2,100 is major resistance. SPX rallied to 1,219.5 Fri, and 1,220 may be resistance. SPX may be creating a bearish head & shoulders pattern, with the left shoulder at 1,217.9, the head at 1,229.1, and the right shoulder at 1,220 (see chart). SPX may pullback, consolidate, and become more volatile next week. Major support is about 1,200, the current 20 day MA, which SPX held over the rally, and 1,200, in general, which is psychological support and a congestion area. Major resistance is at 1,220 and 1,229 (the recent high).
OIH closed at an all-time high and created a bearish hammer Fri. Major resistance is Fri's high at 104. Major support is at 100.30 (previous highs), and the 10 day MA, currently at 99 1/4. There's also an open gap at just below 95 1/2, and Jul Max Pain is still 95. OIH rose about 20 points, while oil rose from $47 to about $59 a barrel. Consequently, if oil falls to the low $50s, then OIH may retrace 50% of the 20 point rise. The steep rise (also, see MACD) suggests a consolidation period soon. Both the RSI and Oscillator (ULT) are severely overbought, particularly for an index.
Perhaps, the oil market has discounted future events that would influence oil prices, e.g. stonger than expected global growth, the start of hurricane season Jun 1st, which may affect oil platforms and refineries in the Gulf, end-of-the-quarter window dressing, and the 4th of July holiday, which is the start of the summer driving season. Also, I may add, the U.S. oil strategic reserve is filled up. So, the federal government isn't draining oil from the market. Moreover, China's economy is "overheating," and it's to China's benefit to grow at a sustainable rate, to prevent inefficiencies.
Next week is a light economic and earnings data week. So, oil prices may have a more influencial effect on stock prices. Consequently, SPX puts, for example, may hedge OIH puts. Both SPX and OIH are at high levels. Economic reports next week are: Mon: Leading Economic Indicators, Thu: Unemployment Claims and Existing Home Sales, and Fri: Durable Goods Orders and New Home Sales. Also, the U.S. weekly oil inventory data Wed should move oil prices. I believe, the positive correlation in stocks and oil will decouple next week, because the longer oil prices stay high, the more negative it will affect earnings of non-energy stocks. Arthur Eckart, PeakTrader.com
See PeakTrader.com Market Overview section in Forum Index for charts.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past three years..
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Trading For A Living - Part 1
There can't be many traders who haven't at least considered the idea of telling the boss what they think of him, throwing it all in and going off to trade the stock market for a living. It's a big risk financially, and that uncertainty is what stops most from jumping ship.
When?
When will the stock market stop going down and start up again? If we knew that we'd all be jillionaires. So what do you do now while stocks are going down and stealing away your money every day?What does history tell us? Here is one very interesting fact.
Eternal Sunshine
There is a current movie entitled "Eternal Sunshine of the Spotless Mind". It is about a man who has had a painful love affair and will do anything to rid his mind of those pain thoughts of a former love.
Losses, not Profits, will Stop You from Trading in the Market
Should the market turn against you, it is important that you design a system that will produce as much loss as you are prepared to take. This loss, known as drawdown, is the maximum amount by which your trading float will temporarily drop at anytime.
Picking Mutual Funds to Outperform the Market
With over 6,000 mutual funds available, it may be tempting to pick funds from a popular star or index rating system. Savvy investors, however, balance multiple factors in their selection process.
Invest In The Stock Market For The RIGHT Reason, Using The RIGHT Choices
Invest in the stock market for the RIGHT reason, using the RIGHT choices!Investing in the stock market is not purchasing a stock at 25 dollars a share, hoping it will go to 35 so you can sell it, then hoping it will drop back to 25 so you can buy it back, so that you can sell it again at 35, and so on and so forth.In my opinion, that is gambling.
Being Wrong Buying Stock is Okay
Being wrong is OK, but let's not carry it to extremes. That applies to everything, but let's limit our discussion here to the stock market.
Emotional Involvement
I'll bet with almost anyone that has stocks or mutual funds in his portfolio that he has losers, but he won't sell them because he "likes them" or some similar excuse. This is the philosophy of a loser.
Bollinger Bands Strategies
The Bollinger Band theory is designed to depict the volatility of a stock. It is quite simple, being composed of a simple moving average, and its upper and lower "bands" that are 2 standard deviations away.
Diversification
Wall Street's watchword has always been diversification, but what does it mean and why do they say it?The standard Wall Street definition is flexible because each broker or financial planner will vary the portfolio based on your age and income. They say that the younger you are the more risk you should take and the older you are the less risk.
Parachute Investing
Ever jumped out of an airplane? It's OK if you have on a parachute. Pretty dumb if you don't.
How Much Money Can I Make With Trading? What Account Size Do I Need To Start?
What account size do I need?How much money can I make with trading?First of all, let's clarify a common misunderstanding: You never risk your full account size. You always have a "catastrophic stop", and it is important to define the "ruin" before you start trading.
Different Ways of Buying Stocks
Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value.
Shorting Stocks - The Basics, Part I of II
What does it mean to short a stock?This means that you borrow the stock from your broker to sell to a third party. The idea is to buy back the stock at a lower price, returning the shares to your broker while leaving the remaining cash in your account as a profit.
Will the Stock Market be Lower in October?
The stock market often closes a week in the middle of a "perceived primary-trend range." SPX closed at about 1,234 Fri, which is between a multi-year Fibonacci level at 1,253 (i.
How to Pay Less and Get More: Discount Broker vs Professional
How do you invest? What do you really pay? At the end of the day, what are your real results? These are questions smart investors should be asking themselves (but usually don't). In this era of more fees, misc.
Why Change Funds?
On November 17 I bought 7 different mutual funds and went to a 100% invested position. One of the funds I bought was Robertson Stevens Information Age (RSIFX) and it has made money as have the other six.
Rebalance And Diversify
The stock market has not been very kind to your investments lately. Your broker knows this so you may have received a call from him suggesting it is time to 'rebalance and diversify' your portfolio.
No Load Mutual Funds: Boost Your Portfolios Returns
Investors who exclusively use broadly diversified, no load mutual funds for their stock investments often lose out on opportunities to increase the reward potential of their portfolios. This article looks at two methods investors may use to enhance the performance of their portfolio of diversifed, no load mutual funds.
Discipline
One of the great "secrets" of successful people is discipline and it doesn't make any difference whether it is manufacturing, processing, servicing or investing in the stock market.Before you can have that discipline you must have a successful plan and stick with it.