Stocks Slammed On Record Oil...

FUNDAMENTAL ANALYSIS
Stocks are totally slammed today on record oil going above $108 per barrel. Oil at this level scares any investors on the street. So why is oil going higher and higher endlessly when OPEC didn't even cut production? Because the dollar is sinking! Because the dollar is dropping, it now takes more dollars to buy the same barrel of oil and sadly, with more rate cuts coming, the dollar is going to just go lower and lower. In fact, Fed fund futures was pricing in a 100% chance of a 100 points cut in the next meeting! This also meant that the Fed may just do a half point cut before the meeting. This Friday's CPI numbers is likely going to be gloomy with all the rate cuts so far (see economic calendar). To make the long story short, higher oil price = lousier earnings = lousier economy = lousier market.

TECHNICAL ANALYSIS
The Dow approached the conservative Jan lows as I have expected in yesterday's report. The lousy thing is this... even this close to the conservative Jan lows, we are not seeing any signs of a capitulation! No volume surge, no panic but a sensible, measured sell off! This, sadly, means that we are in a full blown bear market where it is sensible to sell off with every reaction rally. In fact, I do expect a reaction rally in the Dow pretty soon with a ceiling at about 12250. Well, its time to watch for 1. signs of definite capitulation over the next few days, 2. a reaction rally. Reaction rallies, or relieve rallies or dead cat bounces or oversold rallies, are very short rallies lacing through every bear market only to end up lower. Most traders sell into reaction rallies, not buy. One evidence supporting the possibility of a reaction rally is the surge in the total equities put call ratio. The last time the put call ratio surged like that was back in January just a couple of days before the January reaction rally. A surge in the put call ratio indicates a rush to put options either for protection or speculation, either way, it is no good. However, such a rush to put options always lead to more sensible buying and a short term rally in the very very near term and that is why the put call ratio is a contrarian indicator. If the market turns around over the next couple of days, it would also form a short term double bottom formation, confirming the reaction rally. Make good use of the reaction rally.


Dow Technical Chart By BEST FREE CHARTING SOFTWARE, TC2007! GET IT NOW!