Keep an Eye on the Weakest Link

 | Jun 28, 2012 | 6:00 AM EDT  | Comments
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Stock quotes in this article:

UGA

,

uso

After I showed the chart of United States Gasoline Fund (UGA) in Wednesday's column, a reader asked me if oil should lead gas. To me, the logical answer to that is, "yes."

This made me go have a look at the ratio of United States Oil Fund (USO) relative to UGA, so let's take a look. The first thing we see is that this ratio has been in a steady downtrend since the start of the year. There has been a series of lower highs and lower lows.

USO vs. UGA

Then we find that the lows from Monday and Tuesday bounced off not one but two lines. Line A is a downtrend line that was broken (to little avail) back in late April before the ratio headed back down. Essentially, this ratio keeps testing that trendline and has been for the whole ride down from May.

Line B simply connects the lows for the last six months. What we need to focus on, going forward, are these two spike highs just above 68%. When it comes to ratios, I find lines work OK -- but the reality is that you either need higher highs or lower lows to make a case for a trend change. A higher high would only come over that flat line, just over 68%.

Understand that I am not talking about liking oil over gasoline. Rather, I am discussing what it would take to see a trend change in the downward spiral that oil has become. Until we see a higher high in this ratio, we will really only be talking about a short-term trade.

While the intermediate-term indicators are all still pointing upward, I would note that the 30-day moving average of the advance-decline line will be back to overbought midweek next week. The timing is interesting considering, that the employment number arrives next Friday. With the July 4 holiday being smack in the middle of the week next week, do you think anyone will even be around for the employment number?

30-Day Moving Average of the Advance-Decline Line

On the sentiment front, I continue to take issue with lack of bearishness -- just 24.7% -- in the Investors Intelligence's weekly survey. I view this as a problem for the market, not so much on an immediate trading basis, but for us to see any sort of sustainable, long-lasting rally.

Investors Intelligence -- Bears

All week long I have said I thought the market would rally again before the quarter ends -- and, while it has rallied, all the market has done is to recapture what it lost Monday. I realize many will fuss over the S&P 500 but I ask you to watch the Russell 2000, as that's the index that has not been able to make higher highs since February. It closed at 775 on Wednesday, and the high from last week was just shy of 790. What would be more telling would be a failure to get back above 790 as the market heads toward another overbought reading. The weakest link is always the one to watch.

Russell 2000


 

Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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