After falling 12 out of the last 13 days and registering 937 new lows on the NYSE yesterday, overnight buyers gathered to help the DOW open up over 100 points on the news that Premier Wen Jiabao of China will announce a new stimulus plan tomorrow.
After such a strong opening, the stock market managed to pick up some momentum throughout the day as some investors covered short positions and began nibbling on commodity stocks.
Seasonality factors are upon us in that the worst of winter is largely behind us. From this point forward the weather will start to get warmer and that means in most years, the demand for energy picks up. Almost every year this cycle seems to repeat itself, as investors start buying energy stocks at the peak of winter and selling begins at the peak of summer.
With so many stimulus programs coming into play and now China and Japan likely to widen efforts to bolster growth, crude oil prices jumped $3.73 a barrel to close at $45.38.
I have been advising investors that we need to watch crude oil prices closely as it will likely tell us where the next major move in the overall stock market is likely to be.
To be clear, I am getting mixed signals as crude oil prices are now at a very key juncture whose technical picture says intermediate-term cycles are extremely overbought, but whose long-term cycles are deeply oversold.
Let me show you what I am talking about.
From this chart you can see that oil prices have seen an intermediate-term advance, expressed in largely a sideways trading range between $33 on the low of the range and $48 on the high of the range.
Crude is now at a very key resistance level at the weekly middle Bollinger Band line, which is at $46.58. What’s more, the weekly stochastics are at %K 99 and %D 97. The fact that crude is this overbought is an indication that some investors are speculating on an improvement in energy consumption in the second half.
However, if we are to believe the stochastics and downside resistance levels, crude oil prices are apt to fall on an intermediate-term basis and if that develops, add the energy stocks to heap of ruinous sectors and even more new lows on the major indexes.
Yet, at the same time the long-term cycles show oil prices to be oversold. Rather than looking at weekly data, let’s focus on the monthly ranges.
From this perspective, it very much looks like a long-term bottom is trying to emerge here, with %K at 8 and %D at 15. Notice the nesting or base pattern setting up here on the monthly ranges.
Add in seasonality factors and another OPEC cut and oil prices could be ready to stage a spring/summer rally.
Consequently, crude oil traders have to make a decision. Will demand for energy be there to support an advance or will further deterioration in the global economy destroy energy demand further?
I think if investors feel oil prices can be supported in this environment enough to be accumulated it may give us important clues as to any potential spring rally in the stock market, because either the stimulus is working enough to turn energy higher or it isn’t working in which case more downside is coming in both energy and the stock market.
This Friday’s jobs report is projected to be very bad again with estimates now showing job losses of over 600K. What I am interested to see is how crude oil prices react to this. Will seasonality factors trump deteriorating fundamentals?
How the stock market reacts to Friday’s report is also crucial.
I want you to look at this chart of the Nasdaq Composite Index.
The OTC has been the strongest of the indexes. Notice that while the broad market has taken out the November lows the Nasdaq Composite is still fighting to stay above that critical support measure.
Yet, notice the indicators. The MACD indicator (the study at the top of the chart) failed to get above zero and is now curling downward. Notice the weekly stochastics which are now at %K 48 and %D 70. This suggest that the weekly charts could still see more downside pressure, with the weekly ranges breaking to lower lows and lower highs from week to week until it gets oversold again.
Also, the RSI is falling. This suggests we are more apt to see the November lows taken out as all other indexes have already done.
Probabilities are just not with the bulls with so many of the indexes having failed at holding key support.
Remain defensive.
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