Oil & Gas: The Payoff

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For months, I’ve been pounding the table on oil and gas being overpriced. Algos have relied heavily on rising oil and gas prices to keep stocks from melting down again. Central banks, however, could not keep interest rates under control as long as inflation was being driven higher by rising oil and gas prices.

A few of our recent missives:

Between Iraq and a Hard Place
Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?
Oil & Gas: Important Role Players
Oil: Stocks’ Co-Pilot

Our premise has been that oil and gas prices, which have ignored supply and demand-based pricing on countless occasions in the past, would be driven lower out of necessity.

With May’s CPI data about to written into the history books, we’re finally seeing the payoff from that stance. Gas has tagged our initial downside target from May 21 [see: Once More, With Feeling], with oil close behind.To make matters even tougher on stocks, Italy is (again) not quite as fixed as the Masters of the Universe would like folks to believe. This has driven the euro progressively lower……and opened the door for the interest rate decline we’ve been expecting.It even made it possible for DB’s next downside target to be tagged.The big question this morning: can the damage be contained, or is SPX’s 2703 support in jeopardy again?

continued for members…

Look for VIX to play an important role. The falling wedge has broken out, and a backtest of the white channel would be a natural consequence. Depending on when it happened, it could range anywhere from 17 to 18.11. If it pushes above the white channel, then SPX has a shot at its SMA200 or even lower.

This leaves 2703 under pressure, again. Besides being a very important Fib, it also serves as the bottom of the rising red corrective channel which has been trying to act as an impulsive rather than corrective wave. If it breaks down, however, then the purple midline and the SMA200 are the next lines of defense.ES has a more clear cut falling channel that argues for a SMA200 backtest at 2636ish. But, TPTB have worked very hard to hold SPX, so I’m not all that confident that it’ll play out.CL appears to have further downside — which should keep stocks under pressure during the session. COMP’s SMA200 continues to climb, but it’s not really in the clear just yet. USDJPY – acting as a shock absorber.UPDATE: 11:20 AM

The initial bounce has faded and SPX is signalling 2680-2689 – depending on whether or not the rising red channel holds. Either is legit, so traders looking for a bigger drop should be on the lookout for a bounce at 2689. CL and RB look like they’ll fall further. Note that DJI’s and SPX’s SMA200 are both about 1.9% below current levels.COMP, however, is about 6.6% above its SMA200 — the divergence growing.Just to clarify:UPDATE: 12:16 PM

There’s the purple channel midline. Only problem with calling it “done” at this point is that CL and RB have further to go.

For those following ES…UPDATE: 12:56 PM

For those playing the bounce, SPX has nearly reached the purple midline. This would be an opportune time to reverse if it plans to head lower.UPDATE: 1:42 PM

Algos chipping away at SPX, possibly going for a SMA5 50 tag at the purple midline: 2692.81. But, VIX didn’t quite reach the .886 (17.73.) If it can reach or exceed it, then SPX should be looking at new lows. UPDATE: 2:36 PM

Still hanging around, within striking distance of DJI’s SMA200. VIX tagged its .886, so watch for a reversal or a breakout. Nice backtest for TNX. I need to run out for a few errands…should be back in 30-45 minutes. UPDATE: 3:30 PM