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Crude Oil Spike Hits Stock Market....

Stock-Markets / Stock Markets 2011 Mar 08, 2011 - 03:46 AM GMT

By: Jack_Steiman

Stock-Markets

It was only a matter of time before oil hit this market with the price of oil over $100 for this long. It has been trading well above $100 dollars per barrel for several days now with a spike near $107 per barrel pre-market today. The market finally gave it up to some degree on this spike, although not as much as one might think based on the breakout technically in place.


The day started out not too bad at all with slight gains, but it didn't take long before the market started to head lower. The selling accelerated quite rapidly with the Nasdaq testing down and breaching its 50-day exponential moving average intra-day. The Nasdaq fell a quick 70 points from top to bottom in just a few short hours, or nearly 3%, which shows you the intensity of the selling. The S&P 500 held well above its 50-day exponential moving average all day, but it, too, sold quite hard once things got going on the Nasdaq.

The Nasdaq often leads both ways, and today was no exception to that rule as the S&P 500 tried hard to hold in the green, while the Nasdaq was decently red. But in the end, the depth of the fall on the Nasdaq took the rest of the market down with it. Oil has been holding on for a while now, and yet the market has found a way to dance around this bad news for the economy. You really had to wonder what was holding this market up, and to this day, all I can say about it is either the market thinks it's a short lived blast up, or that the bull market is just that powerful. My guess is a bit of both.

The price of oil controlled by overnight circumstances overseas. The market doesn't seem to think this is a long-term problem to be sure, although that doesn't mean it can't have short-term affects to the down side, offering up a nice correction to unwind things down to where you can buy far more aggressively. If oil stays up at high prices, such as we're seeing now, the perception alone of what that can do to our economy will take this market lower. The game of psychology being as important as real events that take place around the world.

It doesn't necessarily matter what the truth is, it's about the perception, and this is what causes folks to hit the sell button. So for now the market is captive to the price of oil on a moment-to-moment basis. The longer we stay over $100 per barrel, the more you'll hear negative talk about this countries future. And that could keep the correction rocking on a while longer, which in truth, would serve this market well.

One thing about corrections is the somewhat predictable nature of what stocks will do from the perspective of how deeply they'll sell or not. If you had a strong earnings report in this past quarter you won't come close to seeing the types of losses that will be sustained from the companies that reported bad earnings in the past quarter. Those are the stocks to avoid, and again, why you should always keep a scoreboard of who did what. Bull trend or bear trend, it's incredibly important to know what took place so you can then choose wisely whether or not to participate going forward from a long or short perspective, depending on what type of market we're in.

In addition, you want to avoid the stocks most tied in to the reason we're selling off in the first place. The catalyst, if you will. With oil the major catalyst, transportation stocks should really be avoided at all costs. This is an ongoing process for every type of market. Know what's causing what in either a bull or bear trend for the short- term and respond accordingly. For now there's no worse place to be than transports. If oil suddenly declines on world events, there will be no better place to be. Simply adjust to the moment's news.

The daily charts are doing some very good unwinding of their recently overbought oscillators. It's a good start and would be great if they actually went to oversold instead of just neutral. The area that needs the most work is the weekly charts as they're just coming out of overbought and would love to see the major index chart RSI's get down to the lower or mid 50's on those weekly charts. The lower the better, especially on those key daily charts. How great would it be to finally get a test down to the 30 RSI level on those daily index charts. Just for once, which would allow for a much more aggressive long stance. With things where they are now, it's not bad to have some exposure, although it would be great to just about go all in but only if things really unwound down across the board on those daily charts.

If they did, the weekly's would be unwound enough. If you're overbought for too long it often takes a period of oversold to occur before you rock back up. Problem is you don't want to get too cute waiting so you let the 60-minute charts offer the right entry, even if we don't quite get totally oversold on the daily charts. Any and all unwinding is welcome on the daily charts folks. We're working our way there but deeper selling would be needed to hit where things would align best.

If the S&P 500 loses 1294 then the Nasdaq will have already lost its 50-day exponential moving average with force. That's what we need to get things lower for some weeks to a couple of months. 2729 is the number on the Nasdaq. With today's close we're just not through it with any force, thus, we need to get confirmation there first. If we do, and it starts to run lower, then we can get the S&P 500 to follow along with the Dow. If that takes place, this market could get a sever test lower as the bears will become far braver having seen all those key 50-day exponential moving averages go away.

It'll take a move below all the 50's across the board because on back tests, the bears will come roaring in to take this puppy back down. Having lost only the Nasdaq, they still won't get overly aggressive. They want to see those 50's get taken out across the board. Then they'll feel good about being short and not having to worry about covering those short positions too quickly. So for now we watch and learn about whether these levels will hold and keep things on the light side for now.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.


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