Lingering indecision of the Fed bailout package caused stocks to get off to a rough start last Friday morning, but the broad market showed resilience for a change, reversing to grind its way higher throughout the day. By the closing bell, the major indices finished with mixed results. Recovering from an opening loss of 2.2%, the Nasdaq Composite finished just 0.2% lower. The S&P 500 followed a similar intraday pattern, but managed to close 0.3% higher. Blue-chips fared even better, enabling the Dow Jones Industrial Average to gain 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices slipped 0.1% and 0.7% respectively. Despite the assorted closing prices, all the main stock market indexes finished near their intraday highs.
Total volume in the NYSE declined 4% below the previous day's level, as volume in the Nasdaq ticked 5% higher. The higher volume loss in the Nasdaq Composite technically caused the index to register a "distribution day," but the intraday price pattern was actually bullish and not indicative of institutional selling. Further, turnover in both exchanges remained below 50-day average levels for the fifth consecutive day, pointing to a lack of commitment amongst traders on both sides of the market.
As we enter the new week, the best trade setups are still found within the various commodity ETFs, many of which are now forming clear "bull flag" patterns on their daily charts. Last week, we pointed out DB Commodity Index Fund (DBC) as a potential buy setup, but it has not yet rallied above its recent high of $36.17. Continuing to consolidate in a tight range, near the vicinity of its 20-day EMA, DBC remains a bullish setup going into today. Sporting a similar chart pattern is the U.S. Oil Fund (USO), which roughly follows the price of crude oil futures. Its daily chart is shown below:
In addition to forming a "bull flag" pattern, USO is also poised to break out above resistance of its intermediate-term downtrend line, which began with the high of July 11, 2008. Drilling down to the shorter-term hourly chart interval, notice how the 200-period moving average (MA) perfectly acted as resistance last week:
This illustrates how the 200-period MA often acts as a pivotal support/resistance level on all chart intervals, not just the more common daily chart. As for a buy entry into USO, one could take a partial position over last Friday's high of $86.67, then add to the position on a confirmed rally above last week's high of $89.16.
