Traders often use intermarket analysis to gain perspective on various correlated markets, and MoneyShow’s Tom Aspray shows how he watches crude oil to glean clues on the stock market’s future direction, as well as providing some specific levels to watch.

Even though the US market opened lower Thursday in line with weak European markets, once again stocks battled back as the S&P 500 closed slightly higher on the day. The market internals were flat for the day but the A/D lines are still in clear uptrends.

The stock market’s ability to absorb the recent selling is a positive sign but the market needs to accelerate to the upside to stop out the remaining market bears. The daily volume analysis on the Spyder Trust (SPY), as well as the S&P futures is still positive and does not show any signs of a market top.

Crude oil is a market I watch closely for hints of a turn in the stock market as it will often top out or bottom out ahead of stocks. Many times crude oil will break through support or resistance days, or even weeks, ahead of the Spyder Trust (SPY).

A review of the crude oil market and two leading energy ETFs can identify the key levels that if overcome may signal the next significant move in the stock market.

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Chart Analysis: The weekly chart of the crude oil futures shows the high in early March 2012 above $115 and the subsequent drop to a low of $80 in June.

  • The rebound from this low briefly overcame the 61.8% Fibonacci retracement resistance in the middle of September.

  • This high corresponded with the high in the S&P 500 as crude then dropped about $17 per barrel.

  • Crude oil has not made a high for several weeks but the weekly on-balance volume (OBV) continues to act well as it is well above its rising WMA.

  • The weekly OBV moved above its WMA on November 23 and four weeks later surpassed the downtrend (line b).

  • The daily OBV (not shown) peaked with prices in early February and was much lower on the highs this week.

The daily chart of the April crude oil contract reveals that on September 19, 2012, it dropped below its support at line c. Over the next four weeks crude developed a broad trading range as the Spyder Trust (SPY) completed its top.

  • Crude oil bottomed in the middle of November and then retested the lows at the end of December while the SPY held well above its lows.

  • Both crude oil and SPY broke out in early January and rallied together until early February.

  • The April contract now shows key resistance at $98.73 (line d) and a close above this level will project a move to the $102 level.

  • The key support now stands at $95.33 and a daily close below this level, especially on high volume will complete a double top formation.

  • The downside targets from the formation are in the $91.80-$92.20 area.

  • The daily chart of SPY shows that there is good chart support from the September highs, line f, at $148.15

NEXT PAGE: Positive Signs for Energy Sector

Tickers Mentioned: Tickers: SPY, XLE, XOP, VLO, WMB