Crude Fuels Third Day of Gains

Wall Street returned from Labor Day weekend with a solid performance on Tuesday as a $3 jump in the price of crude oil and gold breaching $1,000 an ounce sent stocks to their third consecutive rally.

Tuesday's session lacked volatility as the Dow traded in a range of just 71 points and stayed in positive territory throughout the day. The benchmark index has now gained more than 200 points over the last three sessions, after having tumbled by 300 points during last week's four-day slide.

Wall Street also benefited from gains overseas as Asian stocks closed sharply higher overnight, led by a 2.14% for Hong Kong's Hang Seng, and the U.K.'s FTSE 100 settled at a new 2009 high.

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The Dow Jones Industrial Average rose 56.07 points, or 0.59%, to 9497.34, the Standard & Poor's 500 climbed 8.99 points, or 0.88%, to 1025.39 and the Nasdaq Composite picked up 18.99 points, or 0.94%, to 2037.77.

Without any major economic or earnings reports to use for guidance, the markets took their cues from the rally in the commodities complex, which sent energy and basic materials stocks like Chevron(CVX: 70.58, 1.62, 2.35%) and Freeport McMoRan (FCX: 68.01, 2.01, 3.05%) jumping.

"Ever since the market's big rally, a lot of folks have been concerned about valuations. But when you see a bid like this, it eases those fears," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co.

The solid gains allowed the bulls to recoup most of last week's losses despite continued concerns about the historically-weak month of September.

“The bears can’t seem to make a good case for the market going down technically. The momentum is clearly on the upside and whether we agree with it or not that seams to be the near-term direction,” commented NYSE trader Ted Weisberg of Seaport Securities.

Crude Gushes Past $71/bbl and Climbing Buy-Side Volume

Crude futures have darted beyond $71/bbl and our 1st and 2nd tier downtrend lines due to today’s rapid, broad-based depreciation of the Dollar.

The Dollar’s weakness makes crude a more attractive import internationally since it is a Dollar-denominated commodity. Hence, bulls have received the development they’ve been looking for to send crude back to comfortable levels. The rise in buy-side activity only supports the strength of today’s movement to the topside. However, the S&P’s failure to participate thus far is bearing down on crude a bit, and could keep crude locked beneath our 3rd tier downtrend line for the time being.

Correlation-wise, technical breakouts in both the EUR/USD and GBP/USD bode well for crude’s near-term outlook. All crude needs is for the S&P futures to follow suit before really causing some damage to the topside. Meanwhile, crude is experiencing multiple inflection points of its own. We expect volatility to pick up as the week progresses due to the wealth of data approaching.

Technically speaking, crude has some more breathing room to the downside now with our 1st and 2nd tier downtrend and 1st tier uptrend lines serving as cushions along with the psychological $70/bbl level. As for the topside, crude futures must face our 3rd tier downtrend line and the lid of the August trading range, no easy feat. Regardless, crude is gaining momentum to the topside and yet needs a follow-through on large volume for confirmation.

Resistances: $71.78/bbl, $71.97/bbl, $72.31/bbl, $72.78/bbl, $73.14/bbl
Supports: $71.13/bbl, $70.91/bbl, $70.71/bbl, $70.18/bbl, $69.82/bbl