Now that oil prices are beginning to settle down some, many of you may be wondering why the equity markets aren't rallying. The reason is simple. In order to provide itself with a springboard to put on an impressive showing, the market is coiling like a spring. This coiling effect causes stocks to pullback to a level that allows the uncoiling effect to be much more impressive.
S&P 500 Index: The month of October is historically weak in the first half of the month, and then is famous for its dramatic reversals in the later half.
Currently, the initial support levels are at the 1210-1200 levels, with long term support coming in around the 1180 mark. If the S&P reverses itself as we anticipate, a powerful move above 1250 would confirm our year end rally call.
As I indicated in the last post, the end of October marks the beginning of the "Best 6 months of the year" for the markets. Ideally, a panic sell off usually makes the beginning of this 6 month period that much more impressive.
NASDAQ 100 Index (QQQQ): Since the beginning of its free fall in 2000-2002, the NASDAQ 100 has become a much hated index among investors. Being the sheep that they are, (love it at the top, hate it at the bottom) investors are reluctant to have anything to do with this index since they had their hats handed to them a few years ago.
Well, Wall Street loves sheep. Now that they have successfully scared all the sheep away, Wall Street is buying again. Since its rally from the 2002 lows, the QQQQ's have been in a 2 year basing pattern that is a stones throw from a potentially big breakout.
A breakout above the 2250 mark would begin a bullish trend for the NASDAQ. In the short run, the QQQQ's have support in the 2000 area, and major support at 1875.
The Dow: I think you're getting the picture now. Where have all the sheep fled? Aside from Real Estate (another sheep trap), many of the remaining sheep have fled to the safer ground of the Dow.
This being said, the S&P and the NASDAQ will probably outperform the Dow in the race to the year-end rally. Initial support for the DOW is around the 10,250 mark, with a top coming in around 11,000.
Energy Prices: Ok, for now its, "pop, pop, fiz, fiz, oh what a relief it is", but for how long. As I had mentioned on Monday, The energy crisis of the 70's is much different than today. In the 70's, the energy crisis was temporary; today they have to take China and India into consideration.
As I had mentioned last week, energy prices, at least on a short term basis, looked very extended. With demand from China and India accelerating, the bull market for oil as well as commodities looks to be in the early stages of a bull market.
In the short term, a break below $63/bbl could drop crude prices down to the mid to low 50's. At these levels, I will be a buyer of oil related shares.
