Technical Outlook: Refiners May Be Bottoming

For the past few weeks, I have been cautioning investors that the market had a high probability of resuming its primary downtrend.

Indeed, the major indices were battered Thursday on heavy volume -- the Dow Jones Industrial Average and the S&P 500 dropped about 3% and the Nasdaq Composite, which had been one of the better performing indices, slid 3.2%.

The main problem is the continued concern by institutional investors of another wave of problems in the financial sector and the lack of a catalyst to drive the market higher. In other words, large buyers aren't willing to commit for any length of time. However, all bear markets eventually come to an end, and that will be the case for this one.

Today I want to step away from that negativity and take a look at a sector that could be in a bottoming process -- the refiners. I continue to be a long-term bull on oil. However, I warned readers of the likelihood of a sharp correction in the oil markets back in May. Even though that has happened, I continue to believe that the correction in oil, oil-service and drilling companies isn't yet over.

That said, the refiners, which have been in a steady downtrend since late last year, appear to be in the process of making a technical bottom. Of course, that bottom will not be confirmed until we see a breakout on solid volume and the price holds above the prior resistance levels.

The one big advantage refiners have over other oil stocks is that they benefit from the drop in oil prices. That's because they buy the crude oil and refine into products such as gasoline or heating oil and profit from what is called the "crack spread," or the difference between what they paid for crude and the price to sell the refined product. So as the price of crude declines, refiners' profits should increase from better margins.