This column was originally published on RealMoney on Jan. 12 at 3:32 p.m. ET. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here .

The Dynamic Trading System remains on its buy signal for the S&P 500 (SPX) today but has no positions in the Nasdaq 100 (NDX).

As I write, the SPX is threatening to confirm yesterday's high-volume breakouts on the Nasdaq Composite and the NDX. Closing confirmation would come on a close above 1427 on the SPX, which looks likely at this point in the day.

The SPX had recently been showing poor relative strength (relative to the tech-heavy Nasdaq Composite and NDX), as energy stocks had been holding the SPX down while crude was selling off. However, today, as crude has stabilized, the energy sector, as represented by the Energy Select Sector SPDR ( XLE), and the oil-services sector, as represented by Oil Service HOLDRs ( OIH), are leading the SPX to the upside.

At this point, with oil down about 33% from its July high and with energy stocks having been laggards, stabilizing oil prices could well be productive for the broad market's near-term prospects. Energy stocks, which represent the largest plurality in the SPX and which tend to move with the price of crude, could rebound, helping to drive the market higher. So it would probably be smart to examine what the price of crude is likely to do.

Let's take a look at crude oil's chart today in the context of the February futures contract, which will expire a week from today. The last trade in February crude-oil futures is Jan. 20, and the final notice is Jan. 24. That means that the volume will roll to March a week from now, and the contract will be completely closed out by the following Wednesday.

Often, trends in crude tend to reach extremes at or near the monthly expiration of the futures contract, at least since the accelerated uptrend began in 2004.

That's probably because the traders in this market have been trend traders, jumping on the momentum train and riding it as long as they can. Those who have tried to fade this market as the monthly expiration dates approach have found the momentum too strong, and they have ultimately been squeezed out of their "fades" heading into those expirations.

This chart shows an indicator called the vertical-horizontal filter, or VHF. This indicator measures the absolute value of the chart's vertical movement relative to the absolute value of the sum of its daily changes over a particular period (in this case, 21 days -- here used because that's a month's worth of trading days).

Light Sweet Crude
Source: The Agile Trader

In other words, when the VHF line is very high, the trend (in whichever direction) is very mature. When the VHF line is very low, the market has consolidated over the 21-day period. To repeat, the VHF line is a measure of the maturity of the trend, irrespective of the trend's direction. So the VHF line is high when the trend is mature, either to the upside or the downside, and low when the market has consolidated the prior trend, whether that trend was to the upside or downside.

The yellow highlights are drawn wherever the VHF line has turned down from a very high level. As you can see, from the beginning of 2005, those yellow highlights were showing up just before important local tops. But in September 2006, that behavior reversed. The right-most yellow highlight showed up as a momentum climax of a downtrend approached.

And now we are seeing a high VHF reading on another sell-down.

The current downtrend is now maturing as we approach next week's expiration event. I'd be looking for this market to begin bottoming near the end of next week, probably in the $48-$50 area. This bottoming is likely to be a process and not a solitary event; it will probably take some time and have a rounded or "W" shape rather than a "V" shape.

That $48 area is near the lower green highlight on the chart, which represents the February 2005 gap up -- a gap that was never filled and that is likely to get filled before this decline is over.

Once crude stabilizes and begins to bottom, the Nasdaq Composite and NDX may well give up their leadership roles, at least in the near term, as money rotates back into energy.
At the time of publication, the Dynamic Trading System was holding bullish SPX positions, although positions may change at any time.

Adam Oliensis is president of Dog Dreams Unlimited, a guaranteed introducing futures brokerage, and editor of the trading service The Agile Trader. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Oliensis appreciates your feedback; click here to send him an email.

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