Trend Exhaustion: Are We There Yet? - By Joe Duarte

The Federal Reserve's interest rate decision will be known by early afternoon. Most "experts" are expecting some kind of a "please everyone" statement about fighting inflation, with perhaps a nod to concern about the growth prospects for the economy. But few are expecting a rate increase.

And if the Fed raised rates in the current environment, it would be out of character, as consumer confidence, especially in an election season is at rock bottom (see above News For Thought item). Furthermore, with gasoline perched above $4 per gallon as driving season is presumably in full swing, and property prices are dropping, a rate hike would be very unpopular, especially in an election season.

Yet, inflation is hot all over the world. India raised interest rates overnight, giving its markets a wild ride. And China has been on a rate hike binge for some time, with its stock market getting clocked.

So, it figures that it's just a matter of time before the Fed eventually raises rates in the U.S., barring a cooling of inflationary pressures here, which seems unlikely, at least in the short term, given the fact that companies, such as Dow Chemical are now able to raise prices and pass costs on to their clients.

As investors, our goal is to protect ourselves from being blindsided by surprising events whenever possible. And in the current market, there are some trends that have been in place for some time, and that are vulnerable to change. So what do the market's look like before the Fed's big moment this afternoon?

The stock market for one, as measured by the S & P 500 (SPX, above) is far from healthy, although it's oversold enough to get some sort of bounce. The key is the 200-day moving average, which is far enough above the 6-24 close to provide significant resistance and at least a place for any rally to pause for some time, even if there was a rally that lasted long enough to get prices back up to the 200-day line.

And under the hood, things look worse for key sectors, such as technology and financial stocks (BKX, below), which have had a dismal year. These areas are also due for a bounce, but so far sellers appear quickly, squashing any rally attempt.

So, the common wisdom is that commodities, especially the agricultural sector has been the place to be. And the chart of the CRB index (CRB, below) clearly supports that notion. The problem, is that just as the banking stocks are so deeply oversold, so do commodities seem to be deeply overbought. This in turn makes investments in the agricultural commodities, which are heavily weighted in the CRB index, a risky proposition at this point.

Which of course brings us back to the centerpiece of any financial market discussion these days, the energy markets.

Crude oil (USO, above) has been the kingpin of investments for the last year. Prices have rocketed higher. Momentum has been on the side of the bulls. And the fundamentals suggest that prices could rise further.

But, there's a lot of pressure building, on Main Street, and in Washington, as gasoline prices have reached levels which are starting to impact the ability of people to get things done.

So what does the chart of USO tell us? Surprisingly, we see a bullish consolidation pattern, which suggests that the market is still orderly, unlike the perception being pushed by some that this is some kind of bubble.

In fact, USO has a good 10% cushion where it could fall and still remain in both an intermediate and long term up trend.

Finally, we look at natural gas (UNG, above). This has been the market that has benefited most from crude's high price and recent consolidation. Value oriented money seems to have migrated to natural gas, whose up trend also remains intact.

The difference, though, is that while oil has consolidated, natural gas has been moving steadily higher. That means that if anything, this will be the next area of consolidation.

Conclusion

The Federal Reserve is not likely to raise interest rates today. But it will make some sort of statement. That statement, and how the market interprets it, is crucial to the markets.

The charts above illustrate that several key markets, the broad stock market, the banking sector, the general commodity markets, crude oil, and natural gas are all at key price junctures.

The remarks by the Federal Reserve, and the prelude to the remarks, with or without an interest rate increase accompanying them are likely to move all of these markets.

If the current price trend in any of these areas is ripe for change, today might be the day when we find out.

No trend lasts forever. And those investors who get complacent are always the ones to pay the price for their folly.

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