It has been interesting to watch fundamental analysts try to square WTI’s price action with the data and news flow over the past couple of years. This May 5 article on CNBC.com was fairly typical of the chatter a few weeks ago.
Oil prices plunged below $44 a barrel overnight in a matter of minutes, putting the market on edge as futures tested yet another key technical level. Traders blamed forced margin calls and computer trading for the so-called flash crash but were not quite sure what caused the drop.
The May 5 mini-crash was no surprise to our readers. As I noted in our May 5 daily update, we’ve been tracking a rising channel for over a year — a channel which broke down several days earlier when oil also dropped through its SMA200. We had had a downside target of 42.84, which CL came fairly close to (43.76) just after midnight, going back to Mar 10 [see: One Way or Another.]
The following day, as the fundamental crowd was coming to grips with the lousy supply/demand picture and forecasting a crash in prices, I reminded members of what really mattered:
CL could go a little further, but will obviously wait until the new highs are secured.
As it turned out, oil was done falling (SPX reached new all-time highs the following session) and its 19% rebound over the next several weeks helped keep stocks on the rise. Its May 18 pop back above its SMA200 was instrumental in SPX rebounding after it had reached our 2354.15 downside target.
We had another mini-meltdown last week, this time with less warning — but, featuring all the same issues. Again, we had a strong signal before it happened. As we noted the morning of May 25:
CL is at or very close to the top of a long-term channel that could put an end to any further escapades.
A few hours later, it landed right in the middle of a smattering of downside targets ranging from 48.76 to 49.50 — a 5.05% single-day drop, its second biggest of the year. It reached our next lower downside target the following day.If fundamentals aren’t driving oil prices, what is? And, what does this latest plunge mean for prices going forward?
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