Drop in Crude: A Two-Sided Coin

If crude oil keeps falling, there could be more profit taking in energy stocks. But it could alleviate fears about higher energy costs curbing spending

By Paul Cherney

From Cherney Market Analysis

The markets became a little more complicated to interpret in Wednesday's session as crude oil futures reversed hard and fostered profit-taking in oil-related shares. The crude contract fell $2.83 to $63.25.

Weakness in energy-related shares hobbled the S&P 500.

The drop in crude oil futures is a coin with two sides. It looks like crude prices might be making a short-term reversal and this could force some more profit-taking in the energy-related stocks. But if oil prices start a trend lower, that could serve to extinguish fears that higher energy-related costs will eat into disposable income (Wal-Mart's (WMT ) excuse), and that might help keep a floor under the markets as money shifts out of energy (on profit-taking) and into other market segments.

Crude futures dropped today, and one day is not a trend, but when you've had so much money pumped into one segment of the market to produce the kinds of gains seen in the energy sector, sometimes there can be a crush for the exits as the dance floor empties.

Both the NASDAQ and the S&P 500 have already had closes below price levels that suggest to me weaker prices for a test of supports S&P 500 1206-1183 and NASDAQ 2106-2076 and unless I see a close in the S&P 500 over 1245 or a close in the NASDAQ over 2195, I will expect some sort of a drift lower. The supports mentioned are not that far from current prices. Some of Wednesday's price action had to have been related to the mechanics of option expiration on Friday and that influence should be short-lived.

I would start to become concerned that my expectations for a drift lower are wrong if the S&P 500 managed to produce a close above 1239, or the NASDAQ managed a close over 2186.


• NASDAQ immediate intraday resistance is a shelf 2146.89-2157.98 (focus 2151-2158). Then 2165-2185.91, resistance gets thick 2177.85 and higher. Anytime immediate resistances are exceeded, they convert to supports until proven otherwise.

• S&P 500 intraday resistance is a shelf 1223.34-1231.90 with a focus 1225.10-1227.61. Resistance is stacked and formidable at 1229-1239.76. A combination of several intraday plateaus creates a focus of resistance at 1238-1242.62, but resistance runs all the way 1245.81. The next focus of resistance above 1245 is 1249.23-1267.


• NASDAQ immediate intraday support is 2135.69-2122.86. The next well-defined layer of support is 2106-2039 with a focus of support 2106-2076 (very strong and should hold if tested).

• The S&P 500 has immediate intraday support in the form a thin shelf 1219-1215. The next meaningful support for the S&P 500 is 1206-1165 with a focus of support 1206-1183 (very strong).

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Cherney is president of Cherney Market Analysis