Kerr-McGee Rests Before It Rises Again

This column was originally published on RealMoney on Aug. 17 at 11:30 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The dynamics in the current market are interesting. It seems that the most popular concern is that rising energy prices will have a negative impact on earnings across most sectors, so the market goes lower.

But those darned energy stocks that should benefit from the high cost of oil are also pulling back. Shouldn't they be moving higher?

The inverse relationship we might expect just isn't holding up right now. I think the reason is simple profit-taking among widely held stocks. With the market beginning to roll over, even the strong stocks become weak.

In addition, August and September are notoriously weak months, so there is just no seasonal bullish tendency to push stocks higher, nor is there any positive catalyst I can see.

One stock that illustrates current market conditions is Kerr-McGee(KMG Quote), which AG Edwards upgraded to buy on Tuesday.

You'd think this would be a positive for the stock, right? Well, the chart below paints a different picture.

Kerr-McGee hit an all-time high intraday on the upgrade Tuesday, but still closed at the low. That's actually bearish for short-term traders.

While the uptrend in energy stocks remains intact, Kerr-McGee reflects the current weakness of the group. And Kerr-McGee's inability to move higher on good news indicates some tired bulls. There is just more supply at present levels than demand can soak up.

I'd look for Kerr-McGee to rest for a while before resuming its uptrend.

As oil prices continue to rise, oil stocks such as Kerr-McGee should be market leaders, so use any pullbacks as buying opportunities.

Now let's look at a few other reader requests.

Semiconductor HOLDRs

Since early April, tech has been trending higher. And while the Semiconductor HOLDRs Trust(SMH Quote) broke through resistance at $35 in early July, the bulls are tired. While the uptrend remains intact (as measured by the 20-period moving average), a retest of prior resistance at $35 is necessary before I'd be comfortable owning tech again.

Chicago Mercantile Exchange

I featured Chicago Mercantile Exchange(CME Quote) last week, noting that the direction of market leaders like this stock would be indicative of the direction of the broader market. Well, on Monday, Chicago Mercantile came under heavy selling pressure -- likely in anticipation of the announcement by the CBOT's board of directors that the CBOT will push ahead with the IPO rather than merge with the CME. That selling pressure continued Tuesday. After the close, the much-anticipated news was announced.

So what's the catalyst for CME moving higher? Other than relief of an oversold condition, I don't see any. A decline to $250 would retrace all of the gains resulting from the rumor of a merger. That's where I'd look to cover a short position.

Whole Foods Market

Whole Foods Market(WFMI Quote) gapped more than $10 in July but has been consolidating those gains for the past few weeks. However, the stock has finally declined back to the breakout level. With RSI (relative strength) confirming a reversal, I'd put a stop on any long position right below support. And I'd look to short the stock at the same level -- with a target of $120 or so.

KB Home

Homebuilders have declined substantially from their July highs. On this daily chart of KB Home(KBH Quote), the uptrend reversed a couple of weeks ago, when the 20-period moving average began moving lower. While the weekly chart (not shown) still indicates a strong uptrend, a break beneath support could lead to another 10% decline before catching a bid.

Be careful out there.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.