Saturday, July 26, 2008

Oil is Right at Support and Will Likely Affect Where The Market Goes From Here

Good afternoon, traders. Here are the major indices, which are basically chopping around right now and appear to be forming a possible trading range. The range is much tighter on the S&P than it is on the Nasdaq. Ranges are not the best situations to trade in - look back to February if you want an example - that was a very tough time for longs and shorts. Hopefully, we can bust out of this range soon, but perhaps it would be good for stocks to base here, allowing more charts to shape up and giving stocks the rest they need to bust out to new highs and perhaps a bigger rally. So just because we don't break these recent highs in the next week or so, I don't necessarily think that's bearish. Then again, 2300 on the Nasdaq and 1250 on the S&P 500 are the key levels on the downside - if these are broken, then perhaps we are due to test the recent lows. All in all, we're still in a situation where making big bets is probably not a great idea.

S&P 500, Nasdaq

I've been fiddling around with a chart for my Market Monitor scans that I use as a guide to where we are at in the markets, in addition to my index charts. With the main ratio moving above and then back below the zero mark recently, it looks similar to several other times this year, namely back in February. Once again, that was not a good time to trade heavily. I found out the hard way. If I see these numbers move significantly above or below the zero line, it will give me a little more guidance at to where the market is headed.

Market Monitor Numbers

Here is the USO. It is right at key support and my guess is that the direction this chart moves will have a huge effect on which way the market moves in the short-term. Most of the really big earnings reports are now out of the way, so oil prices likely become even more important now. Based on the chart, I would expect oil to bounce sometime soon, which I think would lead to a further pullback in everything non-commodity related. It doesn't have to bounce, however. A break below the $98 area could lead to more selling in crude, which would obviously be bullish for the market.

The Most Important Chart in the Market

Basically I am looking at three scenarios for next week: Oil breaksdown further, oil bounces higher, or oil does nothing. Here are some ideas for those three scenarios:


Obviously, I would look to be getting long for some swing trades. First, I did want to post the two charts I discussed Friday. These are among the best I see and I am looking to enter on any pullback.


The three areas I would focus on if oil falls further are the airlines, truckers, and (gasp..) the banks. These have run but rested for the past few days, and rested nicely. Volume was lower in most cases the past two days, and although these charts aren't necessarily the ones I look for as longer-term holdings, I think they might work for swing trades. Up first are some airlines...


Here are the truckers. These are more worthy of being longer-term holdings, as their charts are strong and have just pulled back briefly this week.


To be honest, I probably won't mess around with any banks, but I have to admit that the pullback many had Thursday and Friday looked bullish - coming on much lower volume. I still think there are many more problems out there so I may let my personal opinions come into play here and just avoid these overall, even though they could run higher.


There continue to be nice charts popping up in the medical sector. Here are some that look pretty good right now.


A few others to watch that appear to be setting up for a run higher if the market decides to cooperate. There is one of these that I really like. Keep an eye on IMAX, PARL, and ARBA as well.

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

#2) If Oil Bounces...

If oil does bounce, I would look to play some of these beaten down oil stocks as short-term plays. These things can move quickly, especially if oil spikes for one or two days. Longer-term, I think they are done and am still looking to short them, but that won't prevent me from taking a shot as one or two day swing trades.


I would focus on shorting the sectors I named above - namely airlines and banks - but I don't see a great number of nice setups here. Actually, I really didn't find a lot of great short setups throughout my scans today. Perhaps that in itself is bullish. Here are a few banks that may work.


I posted these China stocks Thursday and still think they could work if the market breaks its recent lows.


A few other tech stocks that may work as shorts if the market falls.

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

#3 - Oil Does Virtually Nothing...

If this happens, we will probably continue to be in a holding pattern with choppy trading. That would make things difficult and it would make sense to make very light committments if you have to make committments at all. Right now, I only have two shorts and one long, and I may close those shorts out soon with small profits.

That is my game plan for next week. I always try to be prepared for anything that happens. We are entering the last month of summer and this summer has been quite eventful already, so there is always the possibility that things slow down as traders finally take vacations. We shall see. Things could go either way right now, so be ready to go long or short as needed and as we hopefully get some confirmation from the market. I am going to try and do another video tomorrow, so be on the lookout for it.


Anonymous said...

My vote is for a bounce in oil. Divergences on the 60-min MACD, it's only the first test of support, and a H&S pattern looks like quite possible. A smaller oil rally, some panic selling in stocks by anyone who thought we already put in a bottom, a higher VIX, and putting in a bottom that will last a while just makes sense. But I'll wait for confirmation before making any moves. I got chopped up too many times trading on the smaller time frame charts lately, and I think I'll trade only on the daily charts, using the smaller ones only to optimize entries and exists, at least until more clarity shows.
Thanks again for your excellent blog posts.

Mac said...

Thanks. You bring up a good point or scenario if oil bounces - perhaps we do sell off and test the recent lows, oil puts in a right shoulder, and then falls for real, allowing stocks to rally for a more meaningful amount of time. We'll see - how often does the market give us what we want.

I am leaning toward a bounce for oil, but I wouldn't put anything past this market.

Gio said...

Nice post mac, good strategy. Its basically the same as mine. I think oil bounces up too. Did u notice USO friday? Dropped 2, but energy held strong.

Mac said...

Thanks Gio, we'll see. Anything is possible, but I would be surprised if oil fell straight down from here without a relief bounce at some point.