Saturday, June 14, 2008

Many Oil Stocks Setting Up in Bullish Short-Term Patterns - Is that Bad News for the Overall Market?

Let's start off with a look at the major indices. I think I can sum up the day best by taking two quotes from IBD...

"The major indexes notched big gains Friday, but lighter volume and few bullish moves among top-rated stocks underscored the market's lack of committed buyers......Given the size of the market's gain, you'd expect a corresponding surge in trading volume. That didn't happen Friday. Nasdaq turnover eased 7% and NYSE volume 8% vs. Thursday's totals."

That is what makes me think Friday was nothing more than part of an oversold bounce. The action was impressive for the overall market, but not very impressive for individual stocks. I saw a few moves on leading stocks, but still don't see a ton setting up besides the oils. Two of my favorite stocks on the long side coming into this week, WIND and IXYS, couldn't move higher either Thursday or Friday and actually reversed after trying to breakout. That's not good.

The indices, as you can see below, did take out some resistance Friday, but both the S&P and Dow have more to overcome right above where they closed. In addition, the indices closed right at their short-term moving averages. Because of this, I would not be surprised to see the market turn right back lower from here, even with Friday's bounce. Frankly, nothing that the market might do would surprise here. My cynical side is kind of expecting another rally Monday after LEH releases what is likely to be a terrible earnings report. Does that make sense? No, but nothing does in this market. In case this bounce does have more to it, I put some secondary resistance levels on the charts as areas to watch for possible reversals.

The Major Indices
I continue to find very little in the way of nice stocks setting up as possible longs, which coincides with the theory that this market is back in correction mode. There are stocks that are hot, like SQNM, but not buyable here. The four below are the best I see. Also keep an eye on AUXL, CPST, and VISN. Besides oils, I can't put any others on here with any conscience. I just don't see many that would be safe buys, especially considering the wackiness of the market.


Speaking of the oils, here they are again. I am seeing a lot of short-term momentum patterns on these stocks (pennants, flags, etc.) that tell me that they are probably not done moving higher. Could they top here? Yeah, anything can happen. But from what I see, many of these are digesting their huge gains in the correct manner - I have not seen too many drastic reversals or pullbacks from stocks that were clearly extended that usually signify a top. If this action holds true, and these stocks do head higher, that is probably not going to be good news for the overall market. Oil prices still seem to dominate trading and the direction of the overall market day by day.

USO has been forming its own little pattern the past week and a half, so it could breakout soon as well. The only worry I would have in this sector is the politicians are able to pull some rabbit out of their hats and knock oil prices down, either by having OPEC agree to pump more oil or raising margin requirements or finally agreeing to allow drilling on our own soil - something like that. Perhaps I am giving the politicians much too much credit - all of those things would require action and common sense. My guess is it doesn't happen. This is the only place I am really considering putting money to work on the long side, even with the wacky market.

Charts from Telechart 2007, Courtesy of Worden Brothers, Inc.

Here are a few shorts to look at. The first group are just short-term patterns that will likely work well IF the market heads lower in a meaningful way. I usually don't play these patterns, but I am seeing a lot of them right now, and they might be worth a shot. Again, it really depends on what the overall market is going to do.


Here are some possible longer-term shorts, but to be honest, I don't love these. FSLR is just a hunch in terms of it running up to its 50 day moving average. PCLN would be low-risk here as the stop loss level is very close by. It needs to head lower Monday or I will likely be stopped out.


If (and that's a big if) oil would somehow stop here and head lower, these four look like good short possibilities. I would not touch them however as long oil stays hot.

Charts from Telechart 2007, Courtesy of Worden Brothers, Inc.

We'll see what next week brings - nothing would surprise me. The LEH earnings will likely dominate things on Monday. Remaining in cash, shorting bounces, or going long only in commodity stocks still seem to be the best options out there for individual investors. I am off for my two-year old son's birthday party. Enjoy the rest of the weekend, and best of luck trading next week.


Anonymous said...

My indicators are saying that on the big picture the market will still be trending down for a while. Bulls are not showing enough strength. But oil starts looking a little weak, too, and could drop a bit with any news. Still, if oil comes down a bit, and the market will go up a bit, I think that would only be temporary, so I'm ready for more shorting and ready to be patient if there's a bounce. I think it's somewhat risky right now to go long on anything unless we're starting to see some real strength.
I like your short picks. Some of their last bounces look weak.

Mac said...

It's still a tough market, no doubt. The oil dynamic is so strong that it will likely continue to dominate for a while. If oil continues to rise, I don't know how the market rises. On the other hand if oil falls, then the market could bounce. I have no idea what will happen with oil, but based on the oil charts I see, things still look bullish to me. Thanks for the comments.

Anonymous said...

Why I think oil might come down at least a bit: When you look at USO on a daily chart with a MACD, you can see a divergence, meaning price is making a new high while MACD is not, which shows that the bulls are getting weak and it's a strong signal that a downtrend is about to start sooner or later.
One other thing I've been looking at since my comment earlier: there's a divergence with MACD (and some other indicators) the other way around with the financials (look at XLF), meaning they look like they're ready to go up for at least a bit. What adds to it is that some of the financial stocks have a high short interest ratio / days to cover (short interest vol divided by average daily vol) is over 20. If there are any signs of strength or some good news, there might be quite some covering going on and prices will shoot up. I generally don't trade against the overall market trend on the big picture, which I still think is down, but this looks tempting. I guess I'll just be ready either way with a couple of buy stops above recent highs and sell short stops below recent lows and wait and see for any signs.
I still consider myself an amateur, so don't take my comments too seriously. If anyone has any input on my thoughts here, I would greatly appreciate it.

Mac said...

Anything is possible, and the financials certainly could bounce here. You are correct in saying they are a heavily shorted area. I always try to keep price and volume as my two most important indicators - I use a few telechart indicators as primary ones as well but use MACD, stochastics, etc, only as seconday indicators. Just a personal preference. Price/volume wise, right now, I don't have the guts to buy these financial stocks. If you do, best of luck.