Huge Volume in Energy ETF

Energy stocks have been selling off sharply since June but may be in the process of putting in a bottom.

In the above weekly chart of XLE (energy ETF) you'll notice that a support level is being tested. You'll also notice that XLE just broke a record for having its largest weekly volume since this ETF began trading.

I think the combination of price support and large volume is a sign that this ETF could be in the process of establishing a bottom. A move above last week's high would be quite bullish in my opinion.

Mortgage Finance Index Diverging

I'm always on the lookout for divergences between various markets. Above we have a daily chart of the Mortgage Finance Index (MFX) and below that is a chart of the S&P 500.
You'll notice on this last push up in the S&P, the Mortgage Finance stocks did not make a new swing high. The Mortgage Finance stocks made a lower high in the face of a rising stock market. In my opinion, this is bearish for the mortgage finance stocks and I think we may see them sell off and retest last month's lows.

We cannot trade the Mortgage Finance Index (MFX) but we can trade some of the most heavily weighted stock components within the index. Some of the weak mortgage stocks are Fannie Mae (FNM), Freddie Mac (FRE) and Countrywide Financial Corp (CFC).

XLE Update

A few of you have been asking me to update my position on XLE so here it comes. Back on January 19th, I wrote about how XLE looks like a buying opportunity. You can read the original post by clicking here.

Since Jan. 19th, XLE has had a nice rally but has not as of yet reached my upside target which is 80. If you are long, I'd raise my protective stop right below the last swing low which is around 72.

Utility Stocks Breaking Out?

About a week ago I posted a few comments about my list of potential longs in the stock market. Since then many of the stocks on my list have broken their uptrend which means I won't be buying them, however there is one group of stocks on my list which is showing some bullishness.

Above is a daily chart of the Utility index and below that is the S&P. Notice how the S&P has been trending lower from October 22nd until now while the UTY index is trending higher. This tells me that money is moving into utility stocks. Also notice that the UTY index is very close to making a new 52 week high. I am long a few utility stocks as of today with the hopes that this index will bust through the year high...we'll see what happens.

S&P Moves Higher While the Mortgage Stocks Show Weakness

The S&P continues to rally and make new highs for the year, but not everything is moving higher with the market. If you take a look at the above chart, you will notice the MFX index (mortgage finance stocks) and in the lower pane is the S&P 500.

What I find interesting about the above chart is that in the face of a stock market rally from August until now, the MFX index has gone sideways to slightly lower. This tells me that this particular group of stocks is under selling pressure and we may see a move down in these stocks in the coming weeks.

For those of you who are bearish on the market and looking for something to short, you may want to follow the mortgage related stocks because in my opinion they look a little heavy here.

Has The Market Bottomed?

Back in July when the stock market was selling off, I posted the above chart of the S&P and the VIX. What I had noticed is that market bottoms have coincided with VIX readings above 16.

As you can see in the above chart, the vix got as high as 30 which to me was a very bullish reading. High VIX readings indicate fear and when you have fear taking place in a bull market, that is always a great time to buy as long as the trend is still in tact.

Notice in the above chart the 70 week moving average which has supported all declines over the past 3 years. A few weeks ago the S&P tested this average and rallied strongly.

I am long the market but unfortunately I didn't buy at the average. Trying to pick the exact bottom could be painful although buying at the average would have worked out amazingly well. I bought about a week later after I saw some buying come into the market.

I didn't buy the S&P but I did buy the NASDAQ and EEM. These two markets are stronger than the S&P and I always try to position myself in the strongest markets.

If I'm right about the market, I think we'll see the NASDAQ and EEM (along with other world markets) make new highs for the year.

Utility Stocks Tumble

On Monday I commented how the weak groups were remaining weak and that I was adding to my short position in utilities, homebuilders and reits. Today we saw many of these weak groups that I have short sell off sharply.

The utility index (UTY) was down over 2.5% today with one of its largest range days in quite some time. As you can see in the above chart the utility index isn't far from making new lows for the month.

Oil Slides

Two days ago I commented about the divergence between oil and oil stocks which you can see in the above chart. On Tuesday and Wednesday I exited my long oil position based on this divergence and as you can see that was the top as oil fell over a dollar today for the June contract.
You can read the post from the other day by clicking here.

Natural Gas Stocks

One of the strongest groups today were the natural gas stocks (XNG)

Above is a weekly chart of DVN. The stock just posted a new high close and is about to make a multi year high if it can trade above 7450.

Divergence In China

Here's a trade I'll be watching for next week.

The top chart is a daily chart of FXI and below that is a chart of the Shanghai index. Notice how the two markets both trend together. Both markets had an accelerated move up from November going into January but notice what is happening now. The Shanghai index (bottom chart) continues to make higher highs while FXI makes lower highs. This is bearish for FXI in my opinion and I will be looking to short FXI next week.

On Friday FXI was down close to 2% on an increase in volume. Notice also that FXI just about filled its gap today when it rallied up to the 105 area but then turned south and closed on its lows forming an outside day bearish engulfment.

If FXI can break below its 3 week uptrend (blue trend line), I'll be looking to get short with a protective stop above tha gap (above 105).

Oil Stocks: Time To Take Profits

I exited the rest of my oil stocks today because of the bearish engulfment that developed in the face of higher crude oil prices. This was a very profitable trade for me and I think this is a good spot to exit and wait for the next pullback to buy.

USO (Crude Oil) I am still holding onto long because seasonally oil should rally into May and the inverted head and shoulders bottom indicates to me that there is more upside coming. I also want to be long USO as I believe tensions with Iran will only get worse and not better. Hopefully I'll be wrong about that, but the charts are telling me to stay long so I will.

Oil and Oil Stocks Continue Showing Strength

Today crude oil and oil stocks had large moves to the upside. The May contract for crude oil was up over 2 dollars closing at 61.88

The oil stocks I have long are having significant rallies with increasing volume as some of these stocks are breaking out.

Notice in the above chart of $XNG (nat gas stocks) the index is at resistance after having a large 4 day move. We may see some profit taking here, but I feel in the days to come the index will breakout.

If you look at the chart of USO (crude oil) it appears a reverse head and shoulders bottom is being formed with an upside target of 61.

I've been bullish on crude oil since mid January due to seasonality and cyclical patterns. I think prices should continue to trend higher into May.

Haliburton Lowers 1st Quarter Estimates

Today I was long a few oil stocks and doing very well until HAL decided to announce at 12:30 that they expect first-quarter earnings to be below Wall Street estimates. I wasn't long HAL, but HAL dropping 3 dollars caused the rest of the oil stocks to sell off as well. I watched my profitable longs turn against me in seconds. I exited quickly but the damage was already done. Trading doesn't get anymore frustrating than this folks.

Oil Drillers Continue Showing Strength

Last Thursday I commented that the Oil Drillers were showing relative strength when compared to crude oil, well today many of the oil drillers had nice moves to the upside even though crude oil was down on the day early this morning.

Today was pretty much a broad based rally in the market, but the oil drillers and refiners were the strongest stocks of the day.

As you can see the OSX has made a new 2 month high today. Stocks like SLB, ESV, CAM, MRO and SII all made new multi month highs.

Silver Better Than Gold?

Another one of my readers wanted to know which gold stocks I like at the moment. I was going to save this post for later in the week but being that my reader took the time out to ask me what I like, I figured I'd take the time out and post about it now.

The bottom chart is a chart of the XAU (gold/silver index). Above that we have two silver stocks, SSRI and PAAS. Notice that the XAU index has made new lows for the year while SSRI and PAAS have not. These two silver stocks are showing relative strength.

Last week silver also showed some strength by breaking out above the prior week's high while gold hasn't done so yet. So it appears to me that silver and the two silver stocks I just mentioned are showing some strength not only to the market as a whole but to gold itself.

There are a few other metal stocks that are showing some relative strength such as AEM, AU, FCX and even a few steel stocks. I haven't bought anything yet but SSRI and PAAS are at the top of my list as potential longs. I like both gold and silver, but silver is the one that is showing a bit more strength as of now. Keep an eye on it!

Crude Oil

I'm not sure what to make of crude oil. I've been bullish since the lows in January and I remain bullish, however I took off my long trade today. Last week I bought USO looking for a move higher but instead I see an "M" formation against me. Looks like a minor double top so I took the trade off at a loss. It feels like crude oil wants to retrace into the fib zone so I'll just let the pullback play itself out and look to buy again when I feel oil is ready to go back up.

I still believe the seasonal low for oil was made in January of this year. I'm just trying to play the short term swings by getting in and out which means I run the risk of getting myself chopped up if crude oil doesn't start trending soon.

Oil Update

I just wanted to post where I am putting my protective stop in oil. If USO were to hit my stop, a double top formation will have formed which would mean USO will probably sell off a bit more...That's why my stop is where it is. I'm bullish on oil, I'm long oil and today it was down $1.61..Nice huh? :-)

Crude Oil Showing Relative Strength

The only market I have long right now is the ETF for crude oil (USO). As you can see in the above chart, oil is showing relative strength when compared to what other markets have done this week. Notice in the lower panel the ratio line of oil vs stocks. Oil is clearly outperforming stocks. It wouldn't surprise me if money began leaving the oil market too next week, but until I see that happen, I am staying long.

Crude Oil: Still Bullish

One of the positions I feel comfortable holding right now is Crude oil. I've been bullish on this market since mid January and I continue to be bullish on oil.

If you look at the above daily chart of the oil ETF (USO), you can see a 1-2-3 formation which I consider bullish. Just trading this 1-2-3 pattern all by itself sometimes can be profitable and at other times it's meaningless. However, when you combine this pattern with another trading tool, the odds of a successful trade increase dramatically.

I'd like to digress for a second here. Sometimes I'll show a chart with a technical tool that is giving for example a sell signal. In addition to this sell signal I'll also show other trading tools that are giving the same indication in terms of direction.. So what I'm trying to say is, I never reach an opinion based on just one indicator. I ALWAYS combine my different analytical methods looking for even more confirmation before I post my opinions on this blog.

What bothers me is that I'll see another blogger read my comments, and then test just one of my trading tools by itself and reach the conclusion that it doesn't work. First of all, its very difficult to quantify price patterns (head and shoulders, oscillator divergence etc) and second of all you're just testing one method out of context. Try testing that price pattern with the other technical tools I am using at the time of the forecast. So if you decide to test the validity of the 1-2-3 pattern in crude oil that I commented about in the above paragraph, make sure you combine it with the other tools I am about to discuss.

I just had to get that off my chest because there is one blogger who cannot come up with original material for his blog so he reads other blogs and then spends his time and energy with faulty testing trying to show why the method doesn't work and then he actually spends time writing about it on his blog. My advice to him is to come up with his own orignal material. Anyway...lets continue

In addition to the 1-2-3 pattern I just spoke about, there is a very strong seasonal tendency for crude oil to rally this time of year. March through early May is when crude oil tends to move higher as you can see in the above 23 year seasonal chart of oil. I think by combining the 1-2-3 pattern at a time of seasonal strength, the odds increase that oil should rally now.

I didn't show a chart of the commercial activity but the commercial traders have been buying recently so I'm going to stay long oil with my maximum protective stop below point 3.

Crude Oil

Crude oil was up again today which is great for my long position in oil and oil stocks, but I'm not happy with what's happening with the crude oil spreads. Like I pointed out yesterday, the spot month or nearby month should rally more than the back months if the market is truly bullish but that is not what's happening.
Here is the net change for the first four months in Crude oil today:
April up... $0.65
May up..... $1.01
June up.....$1.25
July up.....$1.30

As you can see the back months are stronger than the nearby months. This bothers me but not enough to make me want to exit my position. As long as price keeps going up I'll stay with my bullish outlook but these spreads are definitely something to keep an eye on.

Above is a chart of April Crude Oil. I see resistance at 61.50. If oil stalls around this area, I will exit a third of my long position because of the spreads.