by Kevin Klombies, Senior Analyst

Thursday, February 21, 2008

Chart Presentation: Da’Nile

Below we start with a chart of the Dow Jones Industrial Index (DJII) even though our focus is on crude oil futures. The DJII pushed up to the 14,000 level in July, corrected lower, and then moved back up and then just beyond this level. The point is that the marginal break to new highs in October actually set the stage for a much more significant price decline.

We mention this because crude oil futures moved up to around 101 yesterday. Technically-speaking crude oil futures have clearly made new all-time highs.

Below we show three charts of the Nasdaq Composite Index. The top chart shows the bear market during 1990 that went with rising oil prices. At middle right we show the 2006 correction that once again went with rising oil prices. On each chart we have marked where the Nasdaq was when crude oil prices reached a peak.

Below we show the Nasdaq from the current time frame. We have lined up the chart so that it shows the same amount of time as the 1990 and 2006 charts.

The Nasdaq’s pattern in both 1990 and 2006 was distinctly ‘V-shaped’ as the slope of the recovery matched almost perfectly the slope of the decline. The pivot point in both instances came at the peak for oil prices so our argument today is that if crude oil futures ultimately fail to shake clear of the 100 level… the equity markets could be setting the stage for a rally back to the October highs by the end of this year’s second quarter.




Equity/Bond Markets

Below is a comparison between Intel (INTC) and Hewlett Packard (HPQ).

The charts are virtually identical with the exception that yesterday’s price surge for HPQ pushed it back above the 200-day e.m.a. line. A week or two ago we showed Intel and Anheuser Busch to make the point that IF the stocks were actually in rising trends then once the moving average lines had ‘crossed’ a recovery rally should begin. That certainly appears to be the case for HPQ.

We started off with a ‘tech’ chart because we wanted to return to the topic of ‘tech versus metals’ and the implications for the U.S. dollar. Below we have included a chart of the U.S. Dollar Index (DXY) futures and the ratio between the Philadelphia Semiconductor Index (SOX) and copper futures prices.

The point here is that at anything close to 1:1 for the SOX/copper ratio we have returned to the original starting point in 1994- 1995 that went with the last major bottom for the dollar. This was also the ratio that set the bottom for the Nasdaq (chart on page 1) in 2006. Obviously the semis can always go lower while copper prices can move higher but… in both the mid-1990’s and the summer of 2006 when the ratio moved back to around 1:1 it marked the start of a shift away from the miners and back to the techs.

Below we have included a chart of gold miner Barrick (ABX) and the ratio between Coke and the S&P 500 Index (KO/SPX). The charts have been offset by 2 years.

At the start of 1994 the U.S. dollar began to decline and the KO/SPX ratio began to rise. Two years later the gold miners reached a peak in early 1996. The idea is that the dollar turned lower at the start of 2006 which once again led to a rising trend for the KO/SPX ratio. Two years later we find the gold miners at new highs. If history were to be kind enough to repeat… the gold sector would top out through the first half of this year and then turn lower as the dollar strengthens.