Crude Oil Confirms Inverse H&S Pattern

Yesterday I wrote about the inverse head and shoulders pattern that is taking place in the oil market and today we saw USO rally over 3% closing above the neckline. I would like to have seen volume a little heavier today but volume did increase slightly when compared to the last few days which is a good sign for the bulls.

If this pattern is successful and oil does indeed rally, I'm looking for an upside target of $43. That's about a $13 rally from current levels... not a bad move. Let's see what happens.

Why I'll Be Watching The Bank Index Next Week

The stock market has been enjoying a rather sizeable eight week rally which began on March 6th. As long as the S&P continues to move higher there is no reason to fight the current uptrend but there is reason to be cautious.

Above is a chart of the Bank Index (BKX) and in the lower pane is the S&P500. Notice on this last move up in the S&P the bank index did not make a new high. This sets up what is known as a bearish divergence and could cause problems for the stock market.

Notice what happened at the beginning of the year when the S&P made a new high, the bank index did not make a new high and the stock market subsequently took a tumble. Well we are seeing the exact same scenario take place right now. The bank index is diverging from the rest of the market which means we may see stocks sell off.

I consider the bank index to be one of the leading groups for the overall direction of the stock market which adds that much more significance to the divergence we are currently seeing. If the banks begin to roll over next week, it is quite possible we will also see the S&P head south as well. Sell in May and go away? I'm not going anywhere, there may be a short trade knocking at my door!