In 2 1/2 days last week, SPX fell from 1,230 to 1,182 breaking several major short-term support levels. Energy and utility stocks, which make up 15% of SPX, fell sharply. OIH (oil ETF), for example, fell from 124 to 110 over the 2 1/2 days of selling. Many institutions held heavy positions in oil stocks for end-of-the-quarter window dressing, and then sold heavily soon after the new quarter started.

A barrel of oil fell less than oil stocks. Oil fell from roughly $66 to $61 over the 2 1/2 day sell-off, and closed at about $62 Friday. Oil has held $60 for two months. However, it seems inevitable that oil will fall further within the next few weeks, perhaps to the low $50s, because of seasonal and cyclical factors. Consequently, there may be rotation from oil stocks into non-oil stocks over the fourth quarter. Many non-oil stocks were severely beaten down by persistently high oil prices, particularly when oil held $60. If earnings growth decelerates slowly, many non-oil stocks are cheap enough to rise sharply.

There's not a statistically significant correlation between oil stocks (and oil prices) and non-oil stocks (and the stock market), because sometimes the economy will drive both oil and non-oil stocks in the same direction, and at other times oil prices will drive oil and non-oil stocks in opposite directions. Last quarter, oil prices and oil stocks rose, many non-oil stocks fell, and the stock market was generally flat. If real economic growth, which has slowed, stabilizes at 2 1/2% to 3% over the next two quarters, then many non-oil stocks should benefit short-term.

The chart below is an SPX monthly chart, since 1998. SPX has strong (multi-year) resistance at around 1,250, i.e. the 61.8% Fibonacci level, and monthly upper Bollinger Band. Strong support is around 1,165, i.e. middle of Bollinger Band, Parabolic SAR buy signal (blue dots), 50% Fibonacci level, and extended Price-by-Volume bar (on left side of chart). If SPX closes below 1,160, then I'd expect at least a 10% correction to below 1,125 (from the four-year high). SPX may then be in position to more easily retest 1,250. However, it's more likely SPX will consolidate above 1,165 before grinding higher to 1,250 (more specific information is in the other five categories of the pay section).

Charts available at PeakTrader.com Forum Index Market Overview section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

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