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Morning Cup of Jo


With oil inventories out today don't be surprised to see continued choppiness in the black gold market.


"There is no memory with less satisfaction in it than the memory of some temptation we resisted."
-James Branch Cabell

Key Points:

  • Eldest Sisters (DJIA & SPX) staging most of the recent rally.
  • NDX, RUS & DJ Trans. lagging for possible divergence in US Equity markets.
  • Sector rotation away from Energy into Large and Mega-cap equities.
  • Quarter-end window-dressing affecting the markets.
  • Bears holding less risk.
  • Explosive topside breakout would present multiple opportunities on the long side of the market.

Market Commentary:

In the last issue of the 'Jo' I talked about the commodity picture in relation to the price of light sweet crude (LSC) and the Oil Services ETF (OIH: AMEX). Today my firm is going to combine these observations with the recent action on the Four Sisters.

Two days after I published, the OIH jumped the proverbial creek and gapped below the 130 support mark as the LSC broke $68/barrel. This immediately sent the commodity speculators running for the door and now Texas Tea is hovering around $60/barrel. With oil inventories out today don't be surprised to see continued choppiness in the black gold market. For those keeping their eye on the commodity, another long-term horizontal support resides around the $57-$58 mark, and it should find some technical underpinnings there. If that breaks however - I'll be very honest – I'm not sure just where the next support lies. The mega-long-term support is around $40 but considering all the geopolitical issues, I'm not sure if that card is actually in the deck.

For the last two years this market (the commodity and related equities) have been a safe haven for speculators who didn't invest in the extreme whipsaws the Four Sisters have given. With the recent downturn and technical break of the oil sector, there has been a rotation of assets into the eldest two sisters – large and mega-cap equities.

The question buried in the back of most investors' minds is, "Is it live or is it Memorex?" Over the last few years the markets have been in this exact same technical situation, attempting to break out into new 5-year highs, but with no avail. Before continuing, let's make one point very clear. There is nothing more my firm would like to see than the U.S. Equity Markets finally breaking out to new highs from the beginning of one of the greatest bear markets in history (2000-2003), at least for the DJIA and SPX.

That being said, and in fear of sounding like Chicken Little, there are some important issues to point out about the Four Sisters' current technical position. My firm has stated many times over the last few months that to truly have an all-out bull run we would need to have the youngest two sisters follow suit. This has yet to occur – but getting very close. It is also not so favorable that the Dow Jones Transportation Index is lagging. These are possible signs of market divergence. In the July 20th issue of the 'Jo' I stated, "The risk level has certainly diminished for the bulls." Today I am going against the crowd, standing out on a limb and saying that in the short-term the risk level for the Bears has diminished and there has to be some credence paid to what is transpiring technically.

Nonetheless, the DJIA will probably see a new high today – at least intra-day – and with the amount of quarter end window-dressing occurring it may last all the way through Friday. The Eye on the Ball section above has been updated to keep a watchful eye on the technical resistance level and correspond to the lines drawn in the charts below.

I'll end with this parting thought…

If the youngest sisters can get their act together, break out of their wonderful bases that have been built over the last 3-4 months and are followed by an explosive move to the upside by the two elders, there should be an abundance of opportunities to take advantage of on the long side of the market in the following quarters.

Click the chart for a larger image.

Click chart for larger image.

Click chart for larger image.

Click chart for larger image.

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No positions in stocks mentioned.

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