Financial Stocks: What the Charts Say

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From Standard & Poor's Equity Research

Chart support, from the top of the base created in August and September, sits around 1490. A 50% retracement of the rally sits right below the 1490 level. There are a host of key moving averages in the area including the 50-and 65-day exponential as well as the 80-day simple.

There is very little overhead resistance for the S&P 500, in our view, so if some of this selling pressure subsides, and we start to get some buying as we move into the seasonally strong period of November through January, we don't see any reason that the index could shoot to new highs, on the way to 1600.

Crude oil prices continued their march higher, closing above $90 per barrel for the first time. Earlier in the week, crude oil pulled back and held just above a layer of chart support in the $84 zone. Prices are back above a bullish channel that has been in place since March, and are very extended from a momentum standpoint. However, we believe crude could run up to the $93-$95 area based on Fibonacci extension of the pullback this summer, and the major correction during last year. We have not gotten any glaring signals from the Commitment of Traders data of late, and this suggests that further upside is possible. However, we believe the rally is getting a little long in the tooth. There has been a negative divergence on the 14-day RSI, a first for the advance. In addition, the 14-week RSI is up to 79, the most overbought that this indicator has gotten during the entire bull run that started in 2001.

Fortunately, gasoline prices have not followed crude oil prices higher yet. Regular gasoline prices hit $2.49 per gallon in May, when crude oil was down in the middle $60s. Despite crude's strong price advance, gasoline prices have actually fallen sine May, and are now around $2.16/gallon and have been very steady since the latter part of July. Since gasoline prices are a function of crude oil prices, the two have been closely correlated over the long term. There are of course factors unique to each market, such as separate supply and demand drivers, the dollar (crude is priced in dollars), imports, additives, politics, etc. We are not going to take the leap and suggest that gasoline prices will catch up with crude. However, we think it presents a potential worry.

Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's .