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Weekend Stock Market Analysis
(7/22/06) This week I thought I would comment on the
historical price of Crude Oil and what affect it has had on the market since the
early 1960's. The chart below is a yearly price chart of Crude Oil since
1960 which is adjusted for inflation. As you can see the price of Crude
Oil was very stable in the 1960's but began to rise sharply starting in 1973 and
peaked in 1980 (points A to B). After topping out in 1980 the price of
Crude Oil then dropped through the middle to late 1980's before making a bottom
in the late 1990's (points B to C) which has then been followed by another
substantial rise. 
Meanwhile if we take a look at the
chart of the Dow going back to the 1960's we can see that as the price of Crude
Oil began to rise in the early 1970's the Dow eventually peaked and then went
through a major sell off (points D to E) which was then followed by a
substantial rally (points E to F). Meanwhile from 1975 through 1980 as the
price of Crude Oil continued higher the Dow got stuck in a trading range between
750 and 1050. Then beginning in the early 1980's as the price of Crude Oil
began to sell off the Dow was finally able to break out of its longer term
trading range and make new highs (points G to H) which was the start of a
Cyclical Bull Market that continued through the late 1990's as the price of
Crude Oil continued to drop. 
Next if we take a look at the
current chart of the Dow going back to the late 1990's one could argue we are
seeing a similar pattern develop like occurred in the 1970's. As the price
of Crude Oil began to rise in the late 1990's then Dow eventually peaked in
early 2000 and then went through a sustained sell off through the late part of
2002 (points I to J) much like we saw in the early to mid 1970's. Next the
Dow then rallied from the late part of 2002 through the early part of 2006
(points J to K) but stalled out just below its early 2000 high (point I).
Keep in mind this is very similar to what happened from late 1974 through 1976
when the Dow rallied strongly (points E to F) but stalled out below its early
high made in 1973 (point D) in the chart above. Furthermore it took
nearly 10 years for the Dow to finally exceed the high in made in early 1973
just above the 1050 area (point D). 
If we see another 10 year cycle
develop like occurred from the early 1970's through the early 1980's then it's
possible the Dow may enter a phase where it begins to develop a longer term
trading range over the next few years and may not exceed the high made in early
2000 until sometime in 2009 if history were to repeat itself. I'm not
saying that this is a 100% certainty but it's something to think about
especially if the price of Crude Oil continues higher over the next year or two
and eventually reaches the high made in 1980. In addition to the
price of Crude Oil another thing to watch over the next several months which
will have an impact on the Nasdaq is the Semiconductor sector. The
Semiconductor Index (SOX) has formed a Bearish looking Double Top pattern (looks
like an upside down "W") and looks poised to retest the low made in
the Fall of 2002 near 360 at some point which appears to be a key longer term
support level. 
Furthermore the 360 level is very
close to the SOX's 61.8% Retracement Level calculated from the Fall 2002 low to
the highs made in early 2004 and 2006 near 560. What happens to the SOX if
it does drop back to the 360 level at some point may well determine the longer
term prospects for the Nasdaq over the next several months. If the SOX was
able to hold support near the 360 level in the months ahead and then mount a
strong rally this would likely have a positive affect on the Nasdaq for the
longer term. However if the SOX were to fail to hold support near the 360
level then this could have dire consequences as the SOX may then eventually drop
back to its 2002 low just above 200. If this were to happen then this
would likely have a substantial negative affect on the Nasdaq for the longer
term. Thus I can't stress enough how important it will be for the SOX to
hold support near the 360 level in the months ahead. 
Finally
with the market currently in a correction your best opportunities will come from
the Exchange Traded Funds (ETF's) and not individual stocks. Our Daily ETF
Signal's are something that may be of interest to those that generally invest in
the ETF's. Our research involving Stochastics on multiple timeframes and
the Volatility Index (VIX) shows that there are certain things to look for that
will signal a nearing Oversold Rally. One of the signals we look for is
when our Stochastic Indicator drops to a value of "0" which indicates
the market is extremely oversold in the near term. Since 2004 this signal
has occurred 7 times and has led to an average gain in the SPY's of 2.6% over
the next few days. The most recent example occurred on July 13th when the
Stochastic Indicator dropped to "0" which gave us a Buy Signal for
Friday July 14th which was followed by a $2.50 move in the SPY's 3 days later.
| Date |
Vix |
Vix |
Vix
% |
Stochastic |
Buy |
SPY |
SPY |
SPY |
SPY |
|
Open |
Close |
Change |
Indicator |
Signals |
Open |
High |
Low |
Close |
| 7/10/2006 |
14.17 |
14.02 |
1.06 |
46.2 |
|
126.94 |
127.43 |
126.41 |
126.85 |
| 7/11/2006 |
14.31 |
13.14 |
8.18 |
86.6 |
|
126.61 |
127.41 |
125.94 |
127.41 |
| 7/12/2006 |
13.39 |
14.49 |
-8.22 |
17.2 |
|
127.21 |
127.4 |
125.72 |
126.05 |
| 7/13/2006 |
15.17 |
17.79 |
-17.27 |
0 |
|
125.5 |
125.68 |
124 |
124 |
| 7/14/2006 |
17.57 |
18.05 |
-2.73 |
23 |
Buy |
124.16 |
124.26 |
122.83 |
123.52 |
| 7/17/2006 |
18.73 |
18.64 |
0.48 |
14.8 |
|
123.5 |
124.1 |
123.15 |
123.34 |
| 7/18/2006 |
18.2 |
17.73 |
2.58 |
60.4 |
|
123.75 |
124.05 |
122.39 |
123.97 |
| 7/19/2006 |
17.62 |
15.55 |
11.75 |
77.3 |
|
124.18 |
126.26 |
124.15 |
125.69 |
| 7/20/2006 |
15.1 |
16.21 |
-7.35 |
45.9 |
|
126.12 |
126.3 |
124.66 |
124.83 |
| 7/21/2006 |
16.23 |
17.56 |
-8.19 |
21.4 |
|
125.15 |
125.19 |
123.82 |
123.95 |
This is just 1 of 6 different signals we look for when
determining if the market has become oversold in the near term. Signup today for a "Free"
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