PeakTrader.com

[arthur]

Next week is a light economic data week: Wed Fed's Beige Book, Thu Unemployment Claims and Wholesale Inventories, and Fri Trade Balance.

Below are daily and weekly OIH charts, and daily and monthly CRB charts. The CRB index includes energy, metals, grains, coffee, sugar, cotton, etc.

The OIH charts, since Aug 2004, show the 20 day MA (currently at about 95) held throughout the recent rally, and the 10 day MA (currently about 97) held over most of the rally. However, the weekly chart shows greater volatility over the past week, severely overbought RSI and ULT (which were both severely overbought only once before), and the 10 and 20 week MAs holding (currently about 91 and about 87, which are far below its current price). So, OIH may pullback next week or become more volatile. Also, OIH is near its all time high at about 101. The point & figure chart shows long-term resistance at 106.

Normally, over the past eight months, when SPX rallied, then OIH consolidated, or vice versa, and both SPX and OIH are much higher (shown in previous charts). With oil prices near $55 a barrel, perhaps, OIH will consolidate, while SPX grinds higher, over the next few weeks (SPX multi-year resistance is 1,253). The severely overbought CRB charts also suggest OIH will consolidate.

I'm concerned about the parabolic rises of some of the indices, which are rising similar to the internet-computer bubble of the late '90s, and the narrowing leadership. The CRB, Utility, and Transport indices seem to be in a bubble. Recently, many small caps and large biotechs, along with Nasdaq, as a whole, have not participated in the rally.

The disparity of valuations, with severely overbought stocks becoming even more severely overbought and relatively undervalued stocks becoming even more undervalued, along with low volatility, make it a particularly tough trading market. Consequently, under these conditions, it may be best to focus on few stocks, e.g. a few small caps and biotechs, use stops on bubble stocks, and use straddles or spreads to take advantage of more volatile stocks. It may also be best to stay heavy in cash, until volatility picks-up, or a more predictable range is established.