Sam Collins

Time to Take a Breather

by Sam Collins   07/30/09

September Crude Oil fell $3.88 to $63.35 a barrel as the U.S. reported a much higher-than-expected increase in crude inventories raising questions about demand. The report showed an increase of 4.1 million barrels vs. an expected build of 1.1 million barrels.

The Amex Energy SPDR (XLE) closed at $49.44, off $1.17. August Gold fell to $927.20, off $11.90, and the PHLX Gold/Silver Index (XAU) was down $3.95 to $138.97.

What the Markets Are Saying

All of the internal indicators of the market that I watch closely are now overbought, and the stochastic of the S&P 500 issued a sell, indicating that the market would likely sustain a moderate pullback. After an extended breakout like this, it is normal for the markets to take a breather and that gives bulls a chance to pick up stocks at lower prices.

This then builds zones of support that will have a better chance of holding back future corrections.

I noted yesterday that the first zone of support for the S&P 500 is the prior breakout level at 945 to 950. Assuming that this holds, the next rally should take the "500" to around 1,005 to 1,010 which was the high of last November.

But if the "500" falls under 930 watch out, because that sort of correction could negate the breakout and lead to something more serious than just a normal round of profit taking.

The message now is to buy on weakness down to the 945 to 950 area. Last week Dorsey Wright reported that the broad economic sectors that reversed up were Basic Materials, Consumer Cyclical, Healthcare, Industrial, Technology, Telecom, and Utilities.

We would therefore highlight those areas for stocks of interest to add to our portfolios.