StockCharts Blogs - ChartWatchers

LARGER CORRECTION LOOMING FOR GOLD?

Gold prices are obviously rising, and they are rising rapidly. However, given the move has begun to go parabolic in its 8-year of rally - we have to question how much higher gold prices can go in both the short and intermediate-term. To this end, the monthly charts adds some perspective in our mind.

First, let us state that we are not gold bugs, although we do believe they are headed sharply higher in the years ahead - hence we're intermediate-term bullish, with projections much higher than current levels. Second, in the shorter-term, we question whether prices have become just a bit too frothy and are in need of a correction. During the bull market since 2001, the 5-month RSI has reached into the 80-to-90 range on several occasions, which in each case corrected rather sharply lower back towards the 50-level before trending higher once again. Presently, the RSI stands at 84. It can go higher; but history has shown the risk-reward of buying gold at current levels may not be the most opportune entry point. Lastly, we would point out that gold prices are now a rather "stout" 45% above their 50-month moving average at $773/oz. Recent history shows us the once the 50% level is obtained, then we should become rather worried about a larger correction unfolding. At today's prices, this would roughly mean another $60/oz rally towards $1200/oz, which is a nice "big number." At that point, we're surely to see the media become even more lathered up than they already are about gold. Then, one should consider pulling back from the market for a bit as the undercapitalized players at taken to the woodshed for a quick beating - pushing prices lower into the oft-tested rising 20-month moving average currently rising through $921/oz.

In other words, those who chase this rally...keep your stops tight; or trade less than normal. In our opinion, there will be a better entry points in the months ahead.

BIOTECHNOLOGY ETF FINDING SPONSORSHIP

We find it rather interesting that the laggard Biotechnology group and the Biotechnology ETF (BBH) in particular have begun to find sponsorship; and it is our opinion that BBH is set to embark upon a period of both absolute and relative out-performance. Quite simply, BBH is forming a rather large and bullish consolidation, which implies prices will move above previous high resistance at $103.50 - a level that has proved for weakness in the past. But the prime reason we should consider long positions is that the 400-day moving average has held, while the longer-dated 40-day stochastic is bottoming in bullish fashion.

From a trading perspective, we would look to buy weakness as it develops in the days ahead. The four largest stocks in the index are Amgen (AMGN), Biogen (BIIB), Gilead (GILD) and Genzyme (GENZ). We have our opinions about the individual shares, and needless to say that AMGN isn't at the top of our list. Those looking to perhaps out-perform BBH...should choose a combination of GENZ and GILD and perhaps some of the other junior shares.

The fact of the matter is Biotechnology is going higher; choose your vehicle carefully.

COMPLACENCY IN THE MARKETS

Complacency, complacency and more complacency. While the media worries about a correction in the strong cyclical bull market, they should quite simply be considering whether or not the cyclical bull has indeed topped out and a cyclical bear market has begun. This is the nature of higher prices; market participants tend to extrapolate the present far into the future - and this is what most market participants are doing right now.

To wit, note the CBOE Volatility Index ($VIX) has forged a low at the 23 level after having traded to mind-numbing 80. Where everyone was bearish the broader market at the highs; they are bullish at the lows. But the lows now look to be turning higher once again, and we should see traders start to notice that trendline resistance was in fact given in bullish fashion; we should further note that the weekly stochastic is turning higher from oversold levels once again. In the past, this has increased the probability of a larger market decline than not; so buyers should be beware. The time to have been bullish is past; the time to consider bearish positions is here. Rallies are to be used to put on short positions; not dips to be buyers. There is a distinction; and it is important to one's trading health.

LOWER PRICES AHEAD FOR XLY?

The insatiable need to own stocks has manifested itself in most S&P sectors, in which the Consumer Discretionary sector is doing far better than anyone can believe. Most, if not all of the clients we speak with on a daily basis do not understand why this is so; they note that they and and their friends and neighbors have pulled back, as well as deleveraging is the order of the day. Therefore, why then, have we seen 75% move off the low in the Consumer Discretionary ETF (XLY)? Quite simply...liquidity.

But having said this, we think the liquidity is going to slowly, but surely dry up as the animal spirits of the "chase" for XLY come to an end. Traders and investors alike will look around them and ask why XLY is so high, and how did it get there? For us, we find the technicals behind a potential short-trade rather "good" at this point, for prices have rallied back to major overhead resistance at the 50% retracement levels off the lows. Too, prices into 120-week moving average resistance with the 30-week stochastic at overbought levels. This seems to us to be a low risk/high reward setup, but it is really only a matter of short-term timing in which to be short XLY. In our opinion then, lower prices are ahead; with our target a simple 50% retracement of the rally back towards the $22 level.

ON HIATUS THIS WEEK

Richard will return for our next issue.

"IF THEY A YELL'IN; THEN YOU SHOULD BE SELL'IN"

The July-August stock market rally has caught many surprised given its strength and duration; however, we are of the opinion that this "freight train" is running of out of fuel, and shall falter from roughly current levels in what may be quite a "quick and nasty" setback at a minimum. It very well may take on a more decidedly bear market decline, but it is far too early for us to determine this.

Quite simply, if we look at the broad-based Wilshire 500 Index, we find the rally off the March low is substantial, but only insofar as a mean reversion exercise towards the 70-week moving average currently at 10,492. Looking back in time, we find that on a closing basis, the Wilshire tends to confirm bull markets once it breaks out above this moving average, and bear markets when this major resistance level proves itself with lower prices. We have just such a fulrcum point roughly 1.5% above current levels.

Our thoughts are simple: we expet thje 70-week moving average to provide resistance to this rally; and for prices to correct rather sharply. However, it shall be the character of that decline that will speak volumes - we hope of course - as to whether a major test of the March lows is in store. From a fundamental perspective - we believe that to be the case; but we have no solid technical evidence to support our supposition. Therefore, we are willing short sellers at current to slightly higher prices, and our stop loss will be two weekly closes above this moving average as we would want to give this position wide lattitude to work given the potential for a major inflection point and the volatiltiy that surrounds them.

In other words: "if they a yell'in; then you should be sell'in"; and traders do seem to be doin so.

COMMODITY SECTOR PICKING UP

On Thursday and Friday of last week, we saw the US dollar resume its downtrend, and the commodity sector begin to pick up participation as a result. This is likely to continue into the future as the US dollar is destined for lower lows; thus we are quite interested in finding parts of the commodity sector that have been "laggards" recently. The first that comes to the "radar screen" is the Agriculture group as it has been "most laggard." This group is primarily comprised of the grains such as Soybeans, Corn and Wheat; but the ETF that we are interested in - the DB Agricultural ETF (DBA) - is comprised of roughly 70% grains and 30% Sugar. This is fine for our puproses; and if we have to make a bullish fundamental case for DBA...it is that the bountiful harvest is already discounted, with any type of stress into harvest leading to a bit of short covering and perhaps a good deal of real buying if anticipated economic growth materializes.

From a technical perspective, we'll simply note that there are a series of higher lows and higher highs forming, which may or may not be part and parcel of a rising bearish flag pattern. But in any case, even if it were a bearish pattern - there is certainly room for an upside trade from its current $25 level to $30 in the weesk and months ahead. Quite simply, DBA is oversold per the 40-day stochastic, which increases the probability of a rather sharp move higher. Too, prices are breaking out above the 150-day moving average, which has been a rather bullish sign in the past as well.

If one chooses to consider this trade, then the risk is for a break of the recent lows at trendline support; while the reward is a trade to $30. Put another way; we'll risk $1.50 for a gain of $4.50.

Good luck and good trading,
Richard

Riding Out the Summer Doldrums

As the summer doldrums set in, we've seen quite a bit of back and forth in the various capital markets, with prices not moving far from where they were just 2-months prior. However, last week was important for the Gold Miners (GDX) we believe, for a very simple, yet elegant weekly "key reversal" higher has formed. Moreover, this pattern occurred from the 60-week moving average, which in the past has provided reasonable resistance and support. However, the 14-week stochastic has yet to turn up in confirmation; but we would expect it to do so from roughly neutral levels - which would posit that GDX will trade from its current $38.64 level upwards towards $45-to-$57.50.

As an aside from this chart, we'll further note that the daily Gold Miners/S&P 500 Ratio (GDX/SPY) is forming a rather bullish pennant pattern, which if comes to fruition would suggest that GDX will outperform SPY by roughly 2-to1 in the months and year ahead.

Thus, given the mixture, we are clearly constructive on the Gold Miners, and would certainly consider being long at current levels. Our risk point would be a bit more than -10% lower to $34.

Good luck and good trading,
Richard

NOT MUCH TO LIKE ABOUT HOUSING...

As the "green shootists" shout from the rooftops about the bottoming of the US and world economy; we think a technical and the Housing Index ($HGX) in particular offer keen insight as to whether one component of what led the US into the housing & credit market bubble...will lead it out. We hear very little about the housing stocks these days, for many are trading at very low levels and many do not believe they will come back anytime soon. Moreover, the current technical patterns may bear this out...no pun intended.

Quite clearly, the downtrend in place since 2005 remains in place as the 50-week exponential moving average remains the bullish-bearish fulcrum point. However, one could reasonably make the argument that prices are attempting to bottom at the 50-level as it has provided support on the past two occasions for prices to visit this level. The first rally attempt off this level faltered in major previous low overhead resistance at the 80-100 zone, did so within the context of the 14-week stochastic turning lower through it trading moving average. This led to lower prices and a second test of the 50-level - which was successful. But, major overhead resistance proved its merit a second time as well, with the stochastic turning lower as well. Hence lower prices are to be anticipated once again, and the 50-level support level is as good as any to target.

For us to become more "bullish" of $HGX, we'd like to see prices hold above the 50-level and the stochastic to turn higher - this would cause us to "dip a toe" in the water with an initial "buy." But the real key to being bullish stands on a breakout above the previous high and the 50-wema...something we think unlikely in the months ahead. Therefore, since we are "bettin men", we'll simply believe prices will form a base between 50 and 100 over the course of the next or so. In other words, there isn't much to like about the housing market or the US economy...really.

Good luck and good trading,
Richard

DRUGS & HEALTHCARE POISED TO OUTPERFORM

As the current rally perpetuates beyond what reasonable technicians would have thought at this point - the buying surge has now surpassed 57 trading sessions, it would appear traders are searching rather intently for those "laggard" groups or stocks to provide them with enhanced risk-reward benefits. This is certainly reasonable we think for the theory is that they will eventually play "catch up" with the broader market as gains in other "high beta" groups are wrung out. To this end, we believe that the Pharmaceutical-Healthcare-Biotechnology groups offer just such a "catch-up" potential.

Our focus today is upon the AMEX Pharmaceutical Index/S&P 500 Ratio ($DRG/$SPX).Clearly $DRG has broken out against $SPX given the declining trendline breakout, with the ratio subsequently correcting lower in a reasonable fashion to "kiss" the breakout level. Thus far, this "kiss" has been successful, with the 20-week stochastic now at oversold levels - a circumstance that in the past with an increased probability of a rally developing. This time should prove no different, and if we had to forecast...we would believe that the highs near .33 would be taken out on any rally.

If we had to postulate two rather interesting individual stocks to be long, then we would look towards Abbott Labs (ABT); Sepracor (SEPR) and Cephalon (CEPH).

Good luck and good trading,
Richard

EMERGING MARKETS TAKING THE LEAD

As the markets have rallied off the March 9th bottom, we find it rather interesting that the Emerging Markets have taken a lead role and have outperformed rather handily. The growing consensus believes that when the worlds' stock markets do bottom, then the Emerging Markets will take the role of "leader" once again. However, we would caution, for rarely do the leaders of past bull markets lead new bull markets. Moreover, and from a fundamental perspective - much of the Emerging Market economic growth was built upon the back of Western credit expansion and conduits to these countries rather than internal growth. Western banks were simply "reaching for yield"; and with higher yields come higher risks. We can only look at the debacle occurring in Eastern Europe; but that is a discussion for another day.

We would like to look at Brazil's BOVESPA Index, for it is quite simple from a technical perspective to delineate both bull and bear markets. And, it appears an inflection point / delineation point has just been reached - the 16-month moving average. For now, prices are weakening from this level, and if the 2000 to 2003 bear market is any guide, then the weakness we've seen from this level will continue and perhaps will result in a test of the lows quite far below current levels. If not, and prices rally above this level - then we can be rather comfortable with believing a new bull market has been born, and we should do nothing more than be buyers.

For now, the risk-reward favors selling short Brazil, and one can do that via EWZ; however, if the 16-month is violated to the upside, then one should be a buyer. We believe a bear market is in force given the manner in which the 5-month RSI is trading, but our battle line at the 16-month is drawn, and now we can asses our risk and trade around it.

Good luck and good trading,
Richard

ENERGY vs S&P 500: A MAJOR MOVE SOONER RATHER THAN LATER

The past several trading sessions have shown an increased propensity for traders to "allocate or rotate" funds into commodity and natural resource stocks. Those gains were no starker than during Friday's trading session, when the S&P Energy Sector (XLE) was higher by +3.23% versus the S&P 500's (SPY) +.54% gain. This circumstance however, hasn't been the norm in recent months, but perhaps it is the beginning of a larger rotation move out of those sectors that have done relative well off the S&P 500 March 9th low such as the S&P Technology Sector (XLK). Time will tell as they say, but the technicals behind the XLE/SPY ratio are setting up reasonably well for a larger XLE move higher against SPY.

The daily XLE/SPY chart is clearly in an uptrend, with the 600-day moving avearge being the fulcrum point of this rally. Once again this level is being tested and arguably given yesterday's sharp move in XLE vs. SPY...it has begun to show its technical merit. The question is whether there is sufficient buying pressure to push the ratio above its 200-day moving aveage that would "seal the deal" for perhaps another run at the highs near .70. In our opinion, there is sufficient cause to believe this will be the case given the 40-day stochastic is plumbing down to near-oversold levels, which in the past has been a bullish harbinger of rallies.

Given these circumstances, and given the XLE is now clearly breaking out above its 100-day moving average - we would think that if long positions were to be added at this juncture, then Energy names would be at the forefront of any list.

Good luck and good trading,
Richard

LUCKY #7

The various US market averages have seen six straight weeks of rally, and one must wonder is "lucky #7" is in the offing. We don't know honestly; however, there are signs the rally off the March 9th low is becoming "long in the tooth" and primed for a rather "nasty correction"in our minds. To this end, we think it instructive to look at the weekly CBOE Volatility Index or VIX.

Our interest here is upon the recent decline from rough panic-level of 80 to its current complacent-level of 34. Quite a bit of marginally good or second derivative news as we could say has pushed it lower; however, we would caution as it is on the verge of forging a bottom that should result in a sharp upward move that would coincide with a larger downward movement in the US market averages. The decline has reached back into trendline support levels, and has done so with the 20-week full stochastic moving back into oversold territory. This latter point is most critical: during bear markets, an oversold stochastic reading such as this has led to sharp upward adjustments. If we had to venture, then we would put the retracement higher at 50% of the downward move, which would roughly target the 55-60 zone.

If this forecast were to come to fruition; then we would likely see the major averages "test" their March lows. Thus, we foresee quite a bit of downside remaining in the equity markets; although there are interim hurdles that must be broken before this will occur. If they hold, then certainly higher prices could materialize in a larger mean reversion exercise; although that isn't our preferred forecast yet.

--
Good luck and good trading,
Richard

LOOKING AT HOMEBUILDERS

As the market continues it counter-trend bullish rally, we find is more than interesting that the Homebuilders haven't yet taken a leadership role. We would posit that given it was the Homebuilders that was the "canary in the coal mine" for the sharp broader market decline, then if the economy were going to turn around and push higher...the Homebuilder ETF (XHB) would be in a very good position to benefit from it given they are quite oversold and heavily shorted. Thus, we would expect XHB to outperform the S&P as a rally unfolded.

Thus far, this hasn't been the case. When we look upon the Homebuilder ETF/ S&P 500 Spyder ETF Ratio (XHB:SPY), it has bounced around near it's lows since November-08, and has risen very little relatively. In other words - "a market performer" - nothing more. However, technical pattern is a tale of two as they can be construed as both bullish and bearish. If the lows continue to hold and the ratio breaks out above the 200-day exponential moving average, then obviously wedge resistance will be challenged and perhaps broken above. If not, and the lows are violated, then we'll see further broad market weakness and probably a slew of homebuilder bankruptcies.

Time will tell as they say; and that time is coming sooner rather than later.

Good luck and good trading,
Richard

FOCUSING ENERGY ON COMMODITIES

The FOMC has now become very serious to put an end to the financial crisis. To put it simply, Wednesday's FOMC  announcement that they plan to roll the printing presses in order to buy $200 billion in longer-dated treasury paper is certainly a "positive." This will no doubt create more inflationary tendencies than we care to talk about, for the FOMC will be forced to buy far more in treasury paper than
anyone believe, so let's just call this the FOMC's "initial position." The fact of the matter is that it will be positive towards the commodity markets; and this is where we should focus our energies.

If one wants to get exposure to commodities other than through a futures contract, one can use the DB Commodities Index ETF (DBC), which includes the energies; the grains and other stuff the index is
made out. Moreover, we find that given this fundamental positive for the commodity markets, we also find that the technicals are syncing up with them as well - meaning the risk-reward dynamic favors being long
DBC now and on pull backs for the foreseeable future.

In particular, we are interested in fact prices moved to new lows and then rallied sufficient to breakout above trendline and 50-day moving avearge resistance levels, and did so not less on a "breakaway gap
higher." In our opinion, this is a powerful combination that should lead to mean reversion to overhead trendline resistance at $27.50, or even perhaps the 250-day moving average currently crossing at $31.00.
Given that DBC is currently trade at $21, we would only risk $2 to $19; thus the risk-reward is clearly skewed towards "reward" at this juncture.

Good luck and good trading,
Richard

LOOKING TOWARDS SECTOR ROTATION

This year has seen the S&P decline by -24.3%; with the building crescendo of "fear" likely to provide for a bottom that can be traded sooner rather than later. We're looking towards sector rotation to play a large part in our trading strategy; and we're quite interested in the fundamentals as well as the technicals regarding a "long Industrials/short Healthcare (XLI:XLV)" pairs position. Quite simply, the Industrials have underperformed the S&P by -10.2% YTD, while Healthcare has outperformed by +7.5% YTD - this notes the obvious safety factor inherent in the Healthcare sector given its "less volatile" nature. However, the Obama Administration's tackling of the US healthcare system has sent XLV prices lower in the past two weeks. Moreover, there will likely be pressure upon XLV for the foreseeable future as Healthcare "safety" becomes a source of funds for those stocks - such as the Industrials - that have been beaten down. This is the fundamental argument.

Technically speaking, the XLI:XLV ratio has fallen rather precipitously in the past year from above 1.20 to a new low at 0.70; but it is precisely this "plunge" that has put the distance below the 130-week exponential moving average at historic proportions, with the 30-week stochastic falling below the oversold 20-level. We are mean reversionists at heart; and given this distance and the prior instances of the 30-week stochastic turning higher - then we are very interested in putting on this trade as the risk-reward is in our favor. Now, it hasn't turned higher yet; but once a catalyst appears...we'll be doing so.

Good luck and good trading,
Richard

BE PREPARED

In our last commentary, we noted that the S&P Energy ETF (XLE) was in the process of forming a bearish consolidation that argues for sharply lower prices. And since then, prices have consolidated further, but
are now poised to breakdown below trendline support and the October-2008 lows. However, this sector remains a favorite of both fundamental and momentum traders as perceived safety plays. However,
we would argue that while they may be so now; they will not be in the future, and in fact - if the market does indeed rally at some point soon - they shall not lead the rally.

In support of this thesis, we look at the S&P Energy ETF vs the S&P Consumer Discretionary ETF (XLE:XLY). Arguably, in this horrid economy, one would think that you would have to be out of your
collective trading mind to buy anything related to the discretionary stocks. But, the ratio chart shows that XLE has under-performed XLY since June-2008, and we are more interested know in the fact a bearish
consolidation has formed, which would imply the trend that began in June-2008 is about to reassert itself in the weeks ahead. Moreover, we see the very same pattern when we look at XLE vs the S&P 500 Spyder (SPY). This leads us to conclude that XLE is not where one wants to hold long positions; either in bull or bear moves, for it is poised to under-perform rather dramatically - perhaps by as much as 25%
difference if our back of envelope technical measurement target a 1.8 ratio. What one was considered "safety", will soon become a source of funds for more "risky" assets. Be forewarned; be prepared.

FOCUSING ON THE ENERGY SECTOR

Our focus today is upon the Energy Sector (XLE) and its relative valuation to the S&P 500 Spyders (SPY). Given the current bear market, we've found recently that market participants are once again willing
to return aggressively to what they know worked rather well in the last bull market - buying energy stocks as the dwindling world energy supply story continues to get quite a bit of play. We think this is
wrong-headed, for Energy is a "late cycle mover" rather than an "early cycle mover" out of recessions. Perhaps it is different this time; but we think not. Hence, we believe it wise to consider lightening up
aggressive overweight energy positions, and in some cases...we would advocate selling short the exploration & production group. We aren't as bearish on the oil service group, but that is a story for another day.

Technically speaking, the ratio has declined from its high of .70 to an initial low at .49, and from that point to today...a bearish sideways consolidation has formed upwards into the 200-day moving average. Perhaps just as important, this moving average is itself rolling over in bearish fashion. Reasonably thinking, we would expect it then to prove its merit as resistance, and for another leg lower to
develop to below the recent low at .49...into the 2005-to-2007 consolidation range. For those Elliotticians out there, this would be a simple A-B-C correction; which would give us two peaks upon which to
draw a declining trendline - a line in the sand upon which when broken above, would then signal the development of the next relative energy bull market. Until then, there is quite a bit of risk holding energy
shares.

PURSUING HEDGING STRATEGIES IN 2009

As the credit crisis continues apace into 2009, we believe the time is rather "ripe" for pursuing various hedging "thematic" strategies to profit from relative valuations across the globe. Quite simply, we believe that the credit crisis will fundamentally impact various global regions in a different manner. Asian countries are likely to prosper more so than Latin American countries as Asia isn't as dependent upon energy or natural resources as is Latin America. Also, Ecuador's tacit default has caused a bit of angst in the region. Therefore, we are putting on a long Asia-Pacific ex-Japan (EPP)/short Latin America (ILF) spread trade.

Technically speaking, we see EPP has underperformed ILF for about the past 5-years; however, that changed in 2Q-2008 as the EPP/ILF ratio broke out of its bullish declining wedge. This bottoming pattern would suggest a multi-year rally; and one that appears ready to trade higher once again after a brief correction back into the now turning higher 60-week exponential moving average. If we keep it simple, and buy the ratio around 1.0, then we can expect over time to gain upwards of 50% on the trade with a target of 1.50.

We believe this shall be a "core position" for some years into the future, and we would look to add in various increments as we see it prove its merit with higher prices. More importantly, given the enormous government intervention into the capital markets around the world, we can not whether stocks go higher or lower - just that EPP outperforms ILF. There is beauty in this trade indeed.

Good luck and good trading!

WORLD MARKETS, CRUDE OIL, AND S&P ENERGY

As we approach the end of the year, we find world stock markets attempting to trade a bit higher, although volatility remains quite high, but off it's worst high levels. However, we believe it shall not be low for very long; hence our propensity is to use this rally attempt to put put back on several short positions. From our trading perspective, we believe the energy sector have quite a bit of downside remaining...even thought the sector has been decimated. Our reasoning: lower crude oil prices on the order of $30-$36/barrel. This range is a bit wider than we have previously stated, and it incorporates last week's Goldman Sachs reversal from $200/barrel to $30/barrel in the next 3-months due to the widening of the "super contango." Our reading of the technicals behind the S&P Energy ETF (XLE) seem to bear this out...no pun intended!

Looking at the XLE weekly chart, we find prices fell off a cliff much like all other sectors - breaking down through its bull market trendline and its 70-week and 200-week moving averages. Obviously this is bearish stuff, with the trend remaining lower. What our interest is in at present is the manner in which prices are consolidating in sideways fashion in conjunction with the inability of the 14-week stochastic to move higher out of oversold territory. This argues rather strongly we think for a resumption of the downtrend in the very near future that should coincide with crude oil prices falling towards our above-stated range. Our target is $33-to$36, which is about -25% off current levels. The question is one of timing.

WILL OIL SERVICES RETEST RECENT LOWS?

The world stock markets remain rather "volatile" as the credit crisis continues to unfold, while this volatility pendulum continues to create some very unique and interesting value propositions we haven't seen in quite some time. Our focus at present is the relative relationship of the Oil Service Index (OSX) to Crude Oil futures; and the fact that this relative ratio is just off its lowest point in over a decade - having fallen from its high above 8.0 in 1998 to its 2008 low near 1.70. The current course of de-levering by the world's hedge funds has pushed this ratio from 4.0 to its recent low near 1.70, with last week's surge higher putting overhead trendline resistance into view in terms of a bullish breakout.

We find this bullish setup interesting from the perspective that perhaps oil service shares may have forged their bottom given last week's reversal from major weekly/monthly support levels; however, we do expect oil service shares to at least retest their recent lows as our forecast for crude oil futures stands at $39-$40...down another $25-$30 from current levels. We would be remiss if we didn't believe that oil service shares would falter in tandem with the price of crude oil.

Having said this, our favorite choices on a retest are Transocean Offshore (RIG), Schlumberger (SLB), Weatherford Int'l (WFT) and National Oilwell Varco (HOV).

"JUMP OFF POINT" FOR CRUDE OIL?

Quite simply, the trend is sharply lower. The massive de-leveraging taking place in the capital markets has not spared crude oil at all; however, this shouldn't be a surprise given the "bell ringing" at the top was none other than a "key reversal month" that has led to mean reversion back into the 50-month moving average. The question is whether this level now crossing at $73.43 can be regained in the days ahead and be used as a "jump off point" to further gains. Unfortunately, we think not. A number of fundamental and technical factors at play will not allow for this to occur, with the probability of an even sharper decline than what we have seen YTD if prices continue to extend lower below this level.

One only need look at the 14-month stochastic that it has just rolled over and exited overbought territory. Hence, it remains quite some distance from levels that in the past have provided for rallies. If the stochastic must move to oversold levels, then it could very well be one year or more before we see a larger and more tradable bottom, this obviously begs the question as to what level crude would obtain before this larger rally could unfold. Our current target is $40,which will come into closer purview if the rising trendline at $60 is violated.

Given this, one would obviously not want to be in the oil stock complex to be sure; with the integrated oil players such as Exxon-Mobil (XOM), Conoco-Phillips (COP). Chevron (CVX) and Marathon Oil (MRO) likely to outperform the Oil Service stocks as they did during the last crude oil downturn. If we are have a favorite, it would be Chevron (CVX) given it sports a 4.10% dividend

Good luck and good trading!

WHERE ARE WE NOW?

The bear market reasserted itself last week in a violent manner; trading sharply higher and lower in a matter of hours and days. This isn't your garden variety bear market as this one smells and feels much different given the enormity of the credit crisis. And there is no end in sight to the crisis from a fundamental perspective, which is giving rise to increasing calls that a "crash" is imminent. Perhaps that indeed what lurks around the corner, but crashes are very low probability events as they reside at the "end of the tail" of the probability distribution curve. We would argue we've had a serious of "mini-crashes" if one looks at the homebuilders; the oil and oil service sector; and the commodity miners. The decline in the homebuilders took 2-years to accomplish, while the oil/oil service and commodity miners took all of 3-months.

The question where does that put us now is a very good one. From a longer-term technical perspective, the S&P monthly chart has broken below its longer-term bull market trendline which would argue for sharply lower prices. However, the 14-month RSI is oversold for only the second time since 1980, with the other time occurring at the October-2002 bottom. This certainly puts the risk-reward towards a countertrend rally in the least. Shorter-term, we find the price distance below the 20-month moving avearge to be on par with that seen at other interim 2000-2002 bear market lows. The 1050-1080 zone is about as low at it gets. Again, this would argue for countertrend rally in the least.

Therefore, the risk-reward favors a tradable rally from current-to-lower levels as quite a bit of negative news has been discounted; the question however, still remains whether the rate of increasingly bearish fundamental news and earnings will overwhelm the technicals. It's all about risk-reward, and it would seem to us barring a low probability crash...we should be considering long positions into this decline.

VIEWING OUR "RISK AVERSION" CHART

We'll admit last week was one of the more "interesting" trading weeks we have seen in a number of years, and if we must liken it to anything we've seen in our 25-years of trading - it would be the week before and of the 1987 Crash. The question we and many others have is whether last week was "The Low" or just "A Low" in the stock market; and to be perfectly frank...we don't know. But perhaps the most important chart in our trading universe at the present time is the simple "tactical allocation" ETF ratio chart between stocks and bonds - we use the S&P 500 Spyder (SPY) and the Lehman 20+year Bond Fund (TLT) ratio as our guide. In essence, this is a "risk-aversion" chart.

Quite simply, as stocks have moved lower, we've seen bond prices move higher/bond yields move lower as institutions/investors/traders have sought out the safety of the bond market at the expense of stocks. This resulted in the SPY/TLT ratio chart moving lower; and it has done so since July-2008 - breaking major support levels along the way. However, last week's unprecedented government intervention related to collapsing credit markets pushed stocks higher and bond prices lower/bond yields higher as market participants "feared" losing more money in the bond market as yields rose, with the only place to put that cash was in money market funds or in stocks - they chose stocks.

Hence, a bullish key reversal has formed off quite low levels, which the 14-week stochastic turning higher from oversold levels. In the past, this has led the ratio higher and coincided with higher stock prices. Whether or not we or you agree with the government intervention - the technicals are showing that last week was at least "a bottom", with the jury still out as to whether it was "the bottom." As we move forward, we'll certainly be able to fill in more of the myriad of technical blanks. Until then, sector and industry tactical long and short rotation will be paramount to outperformance.

Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com

MORE S&P 500 DECLINES AHEAD?

The world's temperature gauge for risk is what we refer to as the "carry-trade" indicator...or the Euro/Yen Spread. When this spread is rising, then the world is said to be putting the carry-trade on and expanding risk profiles; conversely, when the spread is falling...the carry-trade is being taken off and risk is being shunned. We look at this to take the temperature of the capital markets in terms of risk. Right now, the patient is sick, and risk is being shunned, and the technical prospects for the patient indicate further risk aversion and a continuation of the "de-leveraging process."

Our statement is backed up by the simple technical fact the weekly Euro/Yen Spread chart has broken below its bull market trendline as well as its bull market 120-week exponential moving average. This would imply the "triple top" will breakdown with a close under 1.52, which would then target previous high support at 1.40 and then even lower.

Therefore, the trend is lower, and we'll note the recent lows in the spread all coincided with trading lows in the S&P 500. Given this material breakdown in the spread, then we'll have to assume that further S&P 500 declines are ahead of us...perhaps sharply so. Henceforth, we are aggressive sellers of rallies as they materialize, with our downside S&P target still rather wide between 960 and 1090.

Good luck and good trading, Richard

Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com