Energy Technical Analysis: What's Behind the Recent Move in the Market?
By Ryan J. Puplava CMT, May 21, 2008
Oil inventories fell short of expectations last week. Supplies fell 5.32 million barrels to 320.4 million while analysts were anticipating a build. The market immediately responded and oil jumped on the release of the information and closed at $133.21 on the floor of the New York Mercantile Exchange. Gasoline also rose 9.19 cents to $3.3963 a gallon and heating oil rose 13.45 cents to $3.9095 a gallon -- despite a rise in refiner capacity to 87.9% utilization.
Now, the first look at this data one would think that this is an awesome day of victory for the energy bulls, of which I am. But the trader inside of me is saying, what a good opportunity to buy some puts or sell some covered calls on energy stocks in the midst of a 226 (400 plus if you count yesterday) point drop in the Dow Jones Industrial Average (INDU). Somebody must be agreeing with me, because the Amex Oil Index (XOI) did an intra-day reversal and finished down on the day.
The OIH exchange traded fund representing the oil service sector also did an intra-day reversal and finished down on the day.
It looks like the precious metals stocks also did an intra-day reversal with the Philadelphia Gold and Silver index (XAU), down 1.63 points to 192.04 with a high of 196.75 today and the Amex Gold Bugs Index (HUI) down 0.66 to 448.42 with a high of 459.48 today. Even the more diversified Amex Gold Miners (GDM) ended down at 1346.45 after hitting a high of 1378.23 if you're concerned about the weightings of the HUI and the XAU.
Unfortunately for us, precious metals and energy investors who place our bets in the companies that produce the commodity, sometimes we're left open to stock market risk, and today is one of those days. The commodities are up, but the stock market is down and investors will liquidate in any sector to get cash if they get panicky. In addition, the short-term trade during March and April that acted on speculation the Federal Reserve would pause or begin raising interest rates to combat inflation should rear its head again based on the Federal Open Market Committee Minutes released today. I don't believe in that short-sighted thinking, yet it’s prevalent enough in mainstream investing that it will affect the markets and create noise that a long-term investor can either ignore or trade on.
You know what looks rather inviting? Alternative energy. Take a look at uranium prices - still sliding; yet stocks are starting to see some real buy signals light up this week with oil at $133. There is a major disconnect in uranium prices relative to any other energy commodity. I feel the same way about solar, wind, geothermal, and any other clean energy stock here with $133 oil after they had peaked in the fall of 2007. I wouldn't advise anybody to go into the market and buy tomorrow, but a pullback in oil stocks over the next couple of weeks could provide ample opportunity to back up the truck in uranium and other alternative energy plays out there.
What a discrepancy between uranium and its friends!
In summary, stock market weakness can affect commodity stocks and short-term energy stocks look bearish. I think this will be a point of better relative performance in the commodity itself over commodity stocks. Hedge funds may play the spread and compound the issue.
The question to be answered over the next few days is whether the Dow Jones Industrial Average can hold the 50-day average. My chart on May 7 pointed to heavy resistance near the 200-day average for the S&P 500 and we're trading down from that level now. If the market holds here, we have a chance to break through the 200-day average and head towards those head and shoulder targets I mentioned two weeks ago. How can that happen in this environment? Jim's answer is liquidity.
© 2008 Ryan Puplava