Chart Presentation: NDX Comparison

Yesterday was a bit of a strange day. It started off in North American tradingwith what appeared to be a break through support for copper futures and ended with a wild rally for the commodity-related equitysectors. The Amex Oil Index, for example, rose a sparkling 5.8% while the Airline Index declined by very close to 5%.

The chart below of copper futures shows the very wide intraday range that served to sustain the rising trend.

At the start of a major rising trend prices often jump sharply but the same is true for rallies in bear markets. The 5-point rise in crude oil futures prices may portend another run at the recent highs or it could simply be a short covering rally in a somewhat oversold market. We have looked at yesterday’s action from dozens of perspectives and we can say with complete conviction that we have no idea which outcome is more likely although our lean is more towards lower oil prices.

At top right we show the Nasdaq 100 Index (NDX) futures from 2000 while below right is a chart of crude oil futures from 2008. The idea is that the ‘ramp’ to the highs for the Nasdaq into March of 2000 was very similar to the trend for crude oil this year. In both cases price corrections consistently held at the 50-day e.m.a. line.

The point is that after the NDX futures broke below the 50-day e.m.a. line in April of 2000 the trend turned negative even though there were a number of wild rallies and 10% intraday price swings. The simplest explanation for yesterday’s oil price strength would be that it was the end of the month, the second last trading day for the August heating oil and gasoline futures contracts, and enough of a one-sided market to create a nice bear market rally.

Our basic view has been that the equity markets began to change trend back in May and June with the dominant theme through the first half of the year (i.e. natural gasand coal) turning negative through the second half of June.

We have argued that the offset to weaker energy prices has been broad strength in the health care sector with a particular emphasis on biotech. The point, however, is that if the markets revert to the old trend then the Amex Natural Gas Index (XNG)- shown at right- is going to remain very strong while stockssuch as Johnson and Johnson (JNJ) weaken. Yesterday may have been a wild reversal day but it is still hard to argue based on the chart at right that anything of true importance took place.

Below right we have included a comparison between Wal Mart (WMT) and the Shanghai Composite Index.

WMT tends to trend inversely to energy prices but it turned higher last year as the Shanghai Comp. peaked and turned lower. To the extent that there is a relationship beyond the purely coincidental… new highs for WMT would suggest that the Shanghai Comp. is going to struggle at its 50-day e.m.a. line before breaking to new lows. The 55- 60 trading range for WMT from April through July argues that if 60 is broken the next target would be 65- 66.

Below is a comparison between Rio Tinto (RTP) and the sum of the Canadian and Australian (CAD plus AUD) dollar futures.

The simple point would be that bottoms for RTP tend to go with tests of the 200-day e.m.a. line for the CAD plus AUD. During the recent ‘strong commodity’ trend each decline below the 200-day e.m.a. line for RTP went with a similar test for the commodity currenciesfollowed by a multi-month push to the upside. From any number of angles the ‘strong commodity’ trend is under pressure but we simply can not argue that it has actually broken. At least not through trading yesterday.