Oil & Gas Come Through Again

Oil and gas futures tagged our next downside targets this morning. RBOB is now off 12.2% in the last two weeks. CL is off 10.8%. While baffling those who focus on fundamentals and various geopolitical risks, these price moves made perfect sense when viewed through our favored prism: “what do TPTB need them to do?”

That equation, my friends, boils down to a few essential elements: inflation, stock market support, politics and chart patterns. While oil gets all the attention, it’s really gasoline prices which do most of the economic fine tuning.

From Oct 3 [see: VIX Takes the Plunge]:

CL and RB…not only reached overhead resistance by our measure, but must deal with bearish API data, another round of Trump tweeting, and a large build in EIA inventory. I think the time has finally come to revert to short, but with tight stops in case this is a head fake.

This morning, RB is threatening to break below the trend line and channel lines that guided that forecast — which, of course, is all about politics.

continued for members…

Done, or dropping through?

From a charting standpoint, it would be a huge deal if it dropped through.

CL has likewise tagged its next downside target. By, being a little ahead of schedule, it chose the TL tag over the .618. But, it’s all good. Just be aware that — like RB — a drop through will mean lower inflation, lower interest rates, possibly lower DXY, and almost certainly lower stock prices.

A breakdown of the channel from 2016 would mean a test of the SMA200 and red trendline at 67ish. A break below those levels would open the door to 59, 52 and finally 46. While such a breakdown would certainly resolve the inflation/interest rate problem (at least in the short run) it would send stocks to new 2018 lows. Pick your poison, DJT.Futures are being rather coy this morning. But, the failure to break out is notable.If they’re not prepared to break out, SPX can remain below the broken white channel (a solid backtest so far) and work its way down to 2703.This is still my base case. So far, VIX has done nothing to argue otherwise. The bounce off the red midline is bullish and suggests a return to at least 26-28ish.

Rates are holding steady.And, the dollar continues to levitate.

It’s a fascinating puzzle. We know the administration craves lower inflation and interest rates and has been agitating for lower oil prices in order to accomplish this (but not too low, as there are oil industry donations to consider.)

The Fed presumably is more open to higher inflation and rates in order to build a better cushion for the next time QE is needed. And, I’d be surprised if they were interested in giving Trump what Trump wants (after his recent complaints.) But, they’d probably rather that inflation remain only high enough to support slightly higher rates. They’ve seen what spikes in rates can do to stocks.

OPEC obviously would prefer oil prices at least bounce a bit. But, Saudi Arabia is under plenty of pressure and is probably more open to doing Trump’s bidding than usual. I suspect they’ll play ball for the time being.

Where does this leave us with respect to oil and gas? This is probably an important bottom for both. But, even if so, we might not get a sharp rebound as has been the case with past reversals. The situation might be different if SPX were to fall below 2703 — a scenario that would gain some credibility if CL and RB really break down.

So, for those considering playing a bounce/reversal in RB/CL, it’s not a bad idea. Just be ready with tight stops in case the politics of the situation win out. And, don’t be surprised if the bounce isn’t very impressive.

CL could rise back up to backtest the SMA10 or 20 at around 72ish. But, I wouldn’t be surprised to see it back down to the SMA200 either right away (also at the white .786) or as it intersects the dashed, red TL later in November.If RB bounces, look for a backtest of its SMA200, currently at 2.0141 and pretty flat. RB needn’t really go anywhere in order to keep a lid on inflation. Simply by going sideways, it should be able to mitigate increases in headline CPI.

UPDATE: 11:26 AM

I believe SPX and ES are about to break down. Hard to say, but it could be a very quick downdraft or a long, slow decline that takes as long as Nov 6 to finish. Speaking of Nov 6, I can’t shake the feeling that the Fed might be doing its part to ensure Trump is neutered in the upcoming elections. Anyone else feeling the same?