Unfinished Business to the Downside
10/10/2005
Who would have thought that crude oil prices could plunge 10% this week (roughly to $60 from $67), and the S&P 500 (SPX) would be DOWN nearly 5%!
If this direct relationship continues to exhibit traction, then based on my longer term work in crude oil, the SPX has unfinished business to the downside.
According to my weekly chart analytics of crude oil, the really long-term chart analytics of oil show the Katrina peak at $70.85 and the ensuing decline into this past week's low at $60.70. My pattern and oscillator work point to additional weakness into the $58-$56 target zone prior to the expectation of renewed buying interest. Let's keep in mind that the oil bull market that originated in late December 1998 at $10.35 likely did NOT end at the Katrina high at $70.85 -- at least not without an eventual full-fledged retest of the high. The August-October weakness represents a pullback within the ongoing bull trend.
If my work proves correct, then crude oil prices will retest the high from a pivot upside reversal from $58-$56, and such a test will tell us plenty about the underlying health of the seven-year bull market.
Oil price direction notwithstanding, the S&P 500 weekly chart also shows unfinished business to the downside.
The good news is that the SPX closed above the August 2004 support line, which cut across the price axis today at 1185. The not-so-good news is that this week's action still represents a key downside reversal spike.
In addition, notice that the weekly oscillators (below) are pointed straight down, which at the very least suggests that the decline that started after the August 3 high at 1245.86, and which picked up steam this week, is not yet complete on the downside.
With that in mind, my work and suspicion lead me to the conclusion that the SPX will break down to new reaction lows, and will head for a test of the April low at 1136.22.
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