This Is Not Convincing

 | Jan 19, 2012 | 6:36 AM EST  | Comments
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I got a lot of questions about the "breakout" Wednesday, so let me begin with the Dow -- which has not broken out. That index is still dancing around 12500. The S&P 500, for its part, has resistance in this entire 1300 area. A true breakout would come around 1320.

What did break out was the Russell2000, as it rose above 770 with ease. However, on a very short-term basis, you can see the small channel I've spied on the chart. That shows the index is at some resistance now.

Russell 2000

Last week I showed the ratio of the S&P to the Russell 2000, which had not yet broken down. It is still struggling to do so, but at least action such as we saw Wednesday, with the small-caps outperforming the big-caps, helps push the ratio in that direction. I will continue to monitor this and keep you posted on the situation.

Ratio of S&P 500 to Russell 2000

Of course, the complainer in me will note that, on the NYSE, there were even fewer stocks making new highs Wednesday than there were Tuesday. The same went for the Nasdaq -- and, for this index, it was not a modest higher high but, rather, well over a 1% move.

I took a look at many of the charts, and it seems the culprits are the cyclicals. Many of those stocks that rose constantly when the dollar declined vs. the euro are struggling to break out from their November highs. So, if the euro can get out of the channel I drew in last week, then maybe new highs can increase and I can stop complaining! A move above $1.29 would surpass last week's minor spike high and clear the upper band of the channel.

Euro-Dollar Pairing

It is my view that, if the euro can break out of this channel, which I believe will happen, then there should be another round of short-covering in the euro.

As for a follow-up on natural gas, which continues to decline on a daily basis, I would note this: For the first time in several weeks, the selling finally subsided in many stocks out of this space. Of course, I just know that, as soon as this Midwest frigid cold migrates to New York City, and all those nat gas traders have to wear a coat to work, we'll see an oversold pop in the commodity.

In the meantime, it has been fascinating to watch the ratio of coal to natural gas over the last five years. The ratio had been moving in favor of coal since early 2010 -- and, in my view, the ratio is now quite stretched. I have circled two other times when we saw spikes up that yielded to declines. In my view, it is now trying to do so again.

Ratio of Coal to Natural Gas

Perhaps, with all those coal stocks warning of poor earnings, we should gather that some utilities have started to move toward cheaper natural gas? Nah -- I must be dreaming!


 

Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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