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As you know, I have been discussing the notable divergences in the transportation stocks relative to the senior indices for over two weeks now, with the IYT pinned below its 50 day moving averge while the S&P 500 sits at fresh 52 weeks highs. Headed into this week, I have urged all members of the 12631 Trading Group (a premium service available only to members of The PPT), to closely watch Union Pacific Corporation. I believe this key railroad company has a daily chart that best exemplifies the essence of the current divergence.

Will we see another leg lower in this correction, or is it already over? Should this pattern break down, I expect the next leg will be swift and painful. Regardless, I believe that a resolution is coming this week, one way or the other, and will have broad market implications.

I should also add that CSX should be watched closely too, as it accounts for roughly 7% of the IYT–Hat Tip: @gtotoy

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These days, XOM trades like a small biotech grenade blowing the arms off of short sellers. Clearly, value investors are starting to be rewarded handsomely for picking up shares last summer, when the oil behemoth was trading around $55. However, fast-foward a few quarters later and we are talking about a stock that pretty much sums up my thoughts on commodities and commodity-related stocks at this point: Not at a major top, but likely at an intermediate-term one.

On my annotated zoomed out monthly chart below, note how steep the angle of ascent in XOM‘s recent breakout has now become. Also note that this is the first time since 2007 that Exxon has pierced its upper monthly Bollinger Band. Indeed, Exxon has spent what little of February we have seen completely outside of its upper monthly BB.

In other words, when I see this many traders trying to “ride the momo” in ExxonMobil, I can’t help but think that someone is being hustled, and it sure as hell will not be me.

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I know everyone is getting Jim Rogers’ style erections these days, with male genitalia shaped as bow ties materializing at the first sound of the word “commodities,” but the short-terrm outlook is not so stimulating. Instead, while I believe that the longer-term bull thesis remains firmly intact, the weekly charts for the ETFs of both cotton and a basket of agricultural commodities, seen below, indicate that the buyers have likely exhausted themselves for the next few weeks.

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In lieu of my usual evening recap detailing the continued troubling underlying divergences in the market despite resilient dip-buyers, I am going to discuss the OIH, once again. Please be sure to go back and read this post detailing the serious, multi-year supply that the oil services ETF is likely to encounter in the $155-$160 area.

Today, the OIH printed what is known in Japanese candlestick terminology as a “hanging man” candle. Basically, the hanging man is aesthetically similar to the bullish hammer. Both candles feature price dropping significantly from where it was at the opening bell, yet the buyers are able to rally back towards the end of the session up near the opening price level. Instead of appearance, what makes the hanging man bearish and the hammer bullish is predicated on when they are printed. If we are in a rather amorphous, oscillating market, then a hammer or hanging man carries far less significance, as too many traders make the mistake of extrapolating on them when they should usually be ignored.

However, after a steep uptrend, the hanging man must be taken very seriously, as there is a distinct possibility of an imminent reversal (just as after a downtrend, the hammer has a high reliability of signaling a bottom). Moreover, as is the case in the daily chart of the OIH seen below, price has been in a rising wedge (pink lines on chart), another pattern that must be taken seriously for its tendency to resolve lower. All of these red lights are being flashed as the OIH is running directly into the multi-year resistance I discussed in my post on Tuesday.

Essentially, there may be a perfect storm brewing in the energy space. Talk of commodities–specifically oil–being on an inevitable run higher for a variety of macro reasons (geopolitical, inflation) may very well prove true over the next few years. In the short run, though, a multitude of technical factors point to a lousy risk/reward profile for being long right here, right now.

Disclosure: No position in OIH

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You know that FCX continues to be one of my main broad market tells, and it has served me well over the years. After the stock has recently seen its share price split, we can see on my annotated daily chart below that Freeport is at a significant crossroads. The stock broke down two weeks ago, and has seen a fair amount of indecision ever since. Yesterday, price was rejected from the gap fill up to that breakdown level. Moreover, the stock is printing a rather indecisive candle today, right at the convergence of the 20 and 50 day moving averages. Finally, note the possibility–again, the mere possibility–of a head and shoulders topping pattern.

Despite the increasingly accepted view that commodities are going higher in a seemingly straight, perpetual line, Freeport needs to be watched closely here with an objective eye, as complacent bulls may be tempting fate.

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I detailed the unfavorable risk/reward profile for allocating fresh capital on the long side to the OIH yesterday based on that monthly. Today, let’s take a look at the monthly SPY. As you can see on my annotated chart below, we have run straight up into a key reference zone–the general $131 area–after printing five consecutive green monthly candles. Moreover, we continue to reside outside of the upper monthly Bollinger Band. Accordingly, extra attention should be paid to position sizing, protective stop losses and timeframe now more than ever with respect to any longs.

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