Could Be Heading for a Gas Rally

 | Jun 27, 2012 | 6:00 AM EDT  | Comments
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Stock quotes in this article:

UGA

Since Wimbledon started this week, I could not help but consider that the market -- going back and forth the way it's been doing -- feels a bit like watching the ball at a tennis match.

In tennis we often see matches in which it seems no one wants to win -- no player able is to dominate the other. That's how it feels in the market these days, as far as the opposing sides of bulls and bears are concerned. There was plenty of bearish news Tuesday, but the bears were unable to press the market lower. Perhaps this was because, as I noted Monday, they had already sold. After all, we saw a marked shift in sentiment between the time of the Federal Reserve meeting and Monday afternoon. Now it will be the bulls' turn -- the ball is back in their court.

This got me thinking that, while folks might be focused on the European Union summit later this week or the Supreme Court decision on healthcare, they are also watching oil. By now, it seems just about everyone who follows the market seems to realize how lousy oil stocks and oil itself are acting, as well as how the S&P 500 seems to be quite highly correlated to them.

Two months ago, folks were excited when oil started to come down. They insisted it was a boon for the U.S. consumer and for retail. At the time, as oil topped $100 a barrel, I argued that the retail stocks had had no problem climbing in the first quarter. I saw no relationship to make that argument valid. I also argued that gas prices where I lived were less than 10% off the highs, an effectively meaningless decline when people filled their tanks.

Yet, on Tuesday, I filled up and regular unleaded gas was $3.05 per gallon. That is down from around $3.95 six weeks ago. Now that felt as though the price had come down! I also saw that South Carolina's average gas price is now under $3, a level not seen since February 2011. For those who don't recall, that is about when the Middle East erupted into the Arab Spring. All I could think was, "Where are those folks who should be bullish based on this?" After all, they were all bulled up when the market was down by less than 10%.

With that in mind, let's take a look at the chart of United States Gasoline Fund (UGA). I realize this fund trades by appointment most days, but do notice all that support, and how the price bounced off that level a few days ago. I can see this rallying to $48-ish, crossing that downtrend line, perhaps even getting folks excited and then pulling back to retest the downtrend line. Perhaps it would even produce a head-and-shoulders bottom.

UGA -- Daily

There is no base in the chart of gasoline. Last year, as you can see, it took months to build one. So all I am suggesting is a short-term rally -- something to take the focus off Europe for a day. It would perhaps be the least-expected thing anyone is currently seeking.

For those who think I am on the wrong track, I will note this: Failure to cross that downtrend line, resulting in a move back down, would likely mean a break of that support.


 

Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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