For What It's Worth

[gjames]

06/22/2012-02:06 PM ET PERFECT KISS OF RESISTANCE THEN SUPPORT
The major indices are butting up against areas of decent chart and Fibonacci resistance, so we think the upside is capped for the near term. While we still see further gains in the intermediate term, and favor the upside, our confidence is not high as there are a number of directional alternatives that could potentially play out in the weeks and months to come. Therefore, we think the major indices will be confined to a wide trading range for the next couple of months, and possibly into the end of 2012.

The S&P 500 has run right to an area of decent chart resistance, from the lows in April, in the 1,360 region. In addition, this level corresponds with a 61.8% retracement of the decline since May 1, and therefore, another piece of potential resistance. We see one potential bullish scenario and one bearish alternative in the weeks ahead.

Remember, a measured move based on the completed inverse head-and-shoulders formation equates to an advance to 1,400. The bullish scenario would be a pullback to the top of the breakout zone in the 1,325 to 1,335 area, followed by another thrust higher to 1,400+. Many times, stock indices and individual issues test breakout levels, so with the "500" back down in the breakout area, its time for the bulls to make a stand. This is generally how strong markets work: breakouts, followed by test, followed by new recovery highs.

The bearish scenario suggests that a top off the early June lows has already transpired and that the breakout zone of 1,325 - 1,335 will be taken out, with a resumption of the current pullback that started in April. This bearish scenario would equate to a false breakout and potentially see the "500" head back to or below the recent lows in the 1,267 to 1,278 area. So, overall, we still think that the "500" is trapped between the 1,200 to 1,400 range, potentially for the rest of the year.

If the breakout zone gets taken out, we would consider that bearish and expect at least a test of the early June lows. Initial chart support lies at 1,292 from the low in mid-May. The rising 200-day simple average comes in at 1,295 while chart support from the pull-back lows sits in the 1,267 to 1,278 area. A 50% retracement of the rally since early June targets the 1,315 area while a 61.8% giveback equates to a decline to 1,304. With yesterday's wipeout, the "500" stopped very close to a 38.2% retracement of the rally.

From a larger scale, a 50% retracement of the rally from October to April targets the 1,249 region, while a 61.8% retracement equates to a decline down to 1,207. This last level also corresponds to the bullish trendline off the March 2009 lows when projecting out to the end of June.

For stocks to acclimate toward the bullish side, we think we need further relief from a declining dollar. We have been calling for an intermediate-term top in the U.S. Dollar Index, and so far that seems to be working out. The index is currently breaking below chart support in the 81.50 region, from the pivot high in January, although the break thus far is very minor. There is strong chart support as well as important trendline support down in the 80 region, and we think that level will be a key test for the greenback. Sentiment toward the dollar recently hit an extremely bullish level, and from a contrarian view, we think this is bearish for the buck.

Gold has pulled back more than we expected, but still sits in an area of potentially strong chart support that runs down to the lows seen recently near 1,525. This region also represents the key price lows from December and September of last year. Sentiment toward gold recently fell to one of its lowest levels since the bull market started. At the same time, commercial hedgers, considered the "smart money," have been raising their net exposure to gold and it's now at its most bullish since 2008. Large and small speculators, considered the "dumb money," have been increasing their net short positions in the futures market and are at their most bearish positions since 2008. On the upside, a break above the 1,630 - 1,640/oz. zone would open the door, in our view, for a strong move higher, with an eventual test of important chart resistance at 1,800/oz. later this year.

We think another piece needed for the bullish resolution for stocks is some sign that crude oil and copper are finally bottoming. Late this week, crude oil (WTI) fell to its lowest level since October 2011 while brent crude declined to its lowest price since December 2010. Since May 1, WTI has fallen off a cliff, plunging 26% in just 36 trade days. This is the largest drop since the financial meltdown in 2008 when crude plunged 51% over 36 trade days. However, there is some hope for an intermediate-term bottom in the not too distant future. The recent decline out of a small consolidation appears to be the fifth wave of the current decline, and looks to us like a panic move. In addition, daily momentum has so far not confirmed the recent price low, so a bullish daily divergence could be tracing out from very oversold territory. Weekly momentum is more oversold than at any time since the major bottom in 2008. WTI has also entered a potentially strong area of chart support from the major consolidation back in 2009 and 2010 that runs from $85/barrel down to $70/barrel. Sentiment toward crude is near its most bearish level in the past three years while COT data is showing the "smart money" raising their net exposure to crude over the past couple of months while the "dumb money" has sharply cut their futures exposure to oil. So, enjoy the "low" gas prices while they last.

In Europe, the FTSE has reversed nicely to the upside, completing a small, bullish reversal formation. However, there is a fair amount of overhead supply sitting on top of prices as well as other pieces of key resistance. The FTSE remains trapped between strong technical support on the downside and strong overhead supply on the upside. Relative strength versus the S&P 500 remains in a longer-term downtrend that started back in September 2010 and recently hit its weakest level since late 2004.

After retracing about 61.8% of the rally from October to March, the index has popped almost 7% since early June, but is just now moving into some key pieces of resistance. Chart resistance starts at 5,600 and is pretty thick up to 6,000, or the March highs. A 50% retracement of the March to June decline targets the 5,611 level, while a 61.8% take-back sits up near 5,700. Trendline resistance, off the highs since March, comes in at 5,640 while the 200-day exponential average is at 5,615. The 65-day average remains below the 200-day, so this crossover system is still on a sell signal. Daily momentum has bullishly broken its downtrend and has been heading higher since mid-May.

The DAX has also reversed back to the upside, and appears to be tracing out a bullish reversal pattern. However, there is a decent amount of resistance on top of current prices, so the upside may be limited in the near term. Relative strength versus the S&P 500 remains in a decline that started in July 2011, but since the middle of September, the RS line has been moving sideways, a sign of a bottom, in our view.

Prices have rallied about 7% since the early June lows, but are approaching a multitude of technical resistance. A 38.2% retracement of the March to June decline sits at 6,420, and that is also the location of both the 65-day and 20-day exponential moving averages. Trendline resistance, off the peaks since March, comes in at 6,515, while a 50% take-back of the decline targets the 6,560 level. Near-term chart resistance starts at 6,523 and runs up to the March highs at 7,158. On the downside, key chart support from the June low is at 5,970.

After cycling into oversold territory in early June, the 14-day RSI has broken the downtrend that started early this year; however, the daily MACD remains in a downtrend in negative territory. While the price action has certainly improved in recent weeks, and we have put in a tradeable bottom, there are still some key technical hurdles to clear, in our view.

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Mark D. Arbeter, CMT - S&P MarketScope

[dan_s]

If this guy is right that oil has upside from here due to the panic selloff on Thursday AND the dollar may weaken from here, then it is bullish for energy stocks.

My charts show a very important support level for WTI at $78. If that holds, we could see a move back up to $82-$84 range. Read today's Flash Alert.

Energy Sector has been beaten up over the last 90 days (for good reason) but it does appear to be oversold compared to the rest of the market. That should result in some rotation to energy stocks if the market can gain some confidence that oil & gas prices will hold at these prices. Increasing demand for oil in the 3rd quarter (a sure thing) and more sanctions against Iran (more headlines) should help.