pebblewriter

Tag: WTI

  • Crude Carnage

    May WTI futures are off almost 35% since Friday’s close.  This drops it below the 17.12 target we first identified in March 2019 when, at 59.32, CL had completed a rising wedge and tagged multiple channel lines.

    Members might recall the 17.12 target was originally set for April 2023 in keeping with a March 2019 cycle study [see: Macro Factor Cycles and Regime Shifts.] The chart patterns and Fib levels fit nicely with the concept of a recurring 2600-day cycle for significant lows.We’ve reiterated the 17.12 target many times, including last December as CL finished on a high note after plunging 45% in the wake of Jamal Khashoggi’s Oct 2018 murder (when the US achieved maximum leverage over the Saudis – see: Coincidences and Consequences.) The last significant bounce accommodated both the Aramco IPO and the year-end equity ramp.

    Oil has been a favorite tool of not only the Saudis but also central bankers and politicians.  In fact, understanding the relationship between oil/gas and inflation, interest rates and equity valuations has made it possible to accurately forecast most of its major moves over the years.

    At times, this has meant ignoring the frequently misleading supply/demand data, OPEC deliberations, and presidential tweets and focusing instead on where central bankers needed oil/gas to go in order to achieve a particular inflation and interest rate goals.

    As interest rates rose over the past few years, for instance, it became obvious that inflation would need to moderate to relieve the building budgetary pressure.

    One major theme on which we’ve focused since calling the top on interest rates in October 2018 [see: Suddenly Interest Rates Matter] has been the relationship between CPI and the YoY delta in gas prices. By “managing” the price of RBOB, CPI and, thus, interest rates could be managed higher or lower as needed.This was a very reliable theme for most of 2018, 2019, and early 2020 – when the focus shifted to oil’s strong correlation to stock prices.

    Oil has long been a major factor in triggering algos to bid up stocks. So, when oil’s major channel from 2016 broke down in February, we knew stocks were in deep trouble.

    With CL dropping through its 2001 lows and approaching its 1998 lows, what might we expect from oil and what are the implications for stocks? As we discussed last week:

    A drop through 19.27 would be reason enough to revert to short with 17.12 and 10.65 the only support between here and zero.

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  • Coincidences and Consequences

    It’s interesting how Khashoggi’s murder top-ticked oil and gas prices…

    …and, so soon after Trump’s latest demand that OPEC lower oil prices.

    I’m certainly not insinuating that Trump had anything to do with Khashoggi’s murder.

    But, OPEC ignored Trump’s Sep 20 demand.  Two weeks later, oil prices had spiked 10% higher.  Since Oct 3, the day of the murder, WTI has fallen 14.5% and RBOB has fallen 16.7%.

    As Churchill famously said, “never let a good crisis go to waste.”

     *  *  *

    Sometimes it’s quite difficult to anticipate a major market move.  You’ve got hundreds of companies, all with their own earnings, outlooks, and market-moving headlines.  Then, there’s the economic news of the day, both domestic and foreign.  And, of course, there are geopolitical developments such as who’s dismembering or cozying up to whom?

    And, sometimes it’s not so difficult at all. It can be as simple as the VIX chart we’ve discussed all week.  From Time to Panic on Tuesday:

    Note that VIX need only break the purple TL [for SPX to bounce.] If VIX doesn’t break down, this should be the end of the line for this bounce.

    It didn’t bounce.  SPX plunged.  Next?

    Or it can be slightly more complex, but still fairly straightforward — such as is the case with oil and gas.

    As we all know, central bank support (low interest rates, among other accommodations) has been critical to stock prices since 2009.  Low interest rates, of course, rely on low inflation.  And, low inflation relies to a great extent on low oil and gas prices (more accurately, low MoM and YoY increases in those prices.

    From last April in Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?

    The complicating factor, of course, is that oil and gas prices took over the job of stimulating algos (chief among the 90% of all trading activity which is conducted by machines) to drive stocks higher.

    Most recently, oil, gas and SPX all bottomed on Feb 11, 2016 and oil and gas prices played an integral role in stimulating the subsequent rally.  The most important nudge was in December 2017, when oil and gas prices broke out of an already rising channel.

    To chartists, and to algos, this is a very bullish maneuver.  It also has the effect of driving inflation and interest rates higher. CPI rose from 2.11% in December 2017 to 2.95 in July 2018.  The 10Y rose from 2.31% in December to 3.24% just a few weeks ago.

    The Fed told us they were okay with this, that they were going to let the economy and inflation “run hot.”  I was among the many doubters, citing the damage that higher rates would inflict on our already alarming budget deficit, but darned if they didn’t do it anyway. I suppose that, at the end of the day, a temporary increase in the rate at which the debt and interest expense are expanding was less important than having a higher perch from which to crash rates during the next GFC.

    Stocks ignored the implications for a while, happy to play follow the leader with oil and gas prices.  The day that RBOB popped out of the rising purple channel was the day that SPX popped above its 2.24 Fibonacci extension at 2703 – a level which might otherwise have provided serious overhead resistance.  It can be seen as the horizontal, purple trend line on the chart below. In early February, though, RBOB’s breakout faltered.  No surprise, but SPX followed along, suffering its biggest and sharpest decline in years.  Like magic, RB quickly popped back above the purple channel top – rescuing SPX and helping it back above 2703.

    Note that SPX went on to new all-time highs in September, only after RB backtested the purple channel and bounced higher.

    And this lovely little correction we’re enjoying?  SPX topped the day that RB failed to break out of the falling yellow channel (also the day of Khashoggi’s murder.)  SPX fell through its 200-day moving average on the day that RB plunged back below the purple channel top.  And, SPX plunged below 2703 on the day that RB fell out of the falling yellow channel.

    With the elections less than two weeks away, I’m not expecting a sharp rebound in oil and gas prices any time soon.  So, the algos will have to rely on other tools — such as VIX, which has now shed 12.5% since tagged our 26 target yesterday.

    So far, VIX’s decline has produced a pretty nifty bounce.  Is it enough to offset weakness in oil and gas and a hawkish Fed which has been browbeaten by a “low-interest rate president?”

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  • FOMC: What Elephant?

    Over the last 20 years, we’ve seen two yield curve (2s10s) inversions: essentially all of 2000 and Dec 2005-May 2007.  The inversions themselves posed no issues for equity markets.  It was the dramatic unwinding of those inversions that produced crashes.Eight months ago, we almost had another.  2s10s had fallen to a trend line connecting those two previous curve lows. Instead of bouncing, however, 2s10s continued falling — reaching a low of .18 on Aug 27.

    Unfortunately, the optics of this approach to an inversion are troublesome.  It is commonly believed that inversions presage recessions.  So, the brain trust in the Eccles Building has a little tightrope walking to do.

    They need to increase the short end of the curve to stave off (understated) inflation and build some cushion for the next financial calamity.  But, to avoid an inversion, they must scale back their intervention in the 10Y — at least enough so it can keep pace with the rapidly rising 2Y.

    Eagle-eyed observers might note that both recently out above the trend line connecting previous highs. Not so coincidentally, this occurred as the above-referenced trend line connecting the 2s10s lows was breached and equities began their Jan-Feb swoon.Can the Fed keep the plates spinning a little longer?  Without question.  Especially if Powell is successful in convincing investors algos that the economy is strong but there is no wage pressure and inflation poses no real threat.

    Should that narrative fail, however, the spectre of higher rates alongside soaring debt levels might finally awaken equity and bond investors to the elephant in the room.

     *  *  *

    So far, the damage resulting from Friday’s channel breakdown has been contained to the August highs.  But, still ahead, EIA inventory reports and the FOMC statement and press conference.

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  • The Devil’s Playground

    Catch this news flash yesterday?  Trump, ironically at a White House meeting with the National Council for the American Worker:

    You’re gonna see on China, today, right after close of business…we’ll be announcing something, uh, and it will be a lot of money coming into the coffers of the United States of America, a lot of money coming in, but you’ll be seeing what we’re doing uh right after close of business today, the markets closing.  Thank you.

    Note the repeated emphasis on the market’s closing. Was there something about the announcement that required a delay?  To paraphrase…the after-hours markets are the devil’s playground.

    The S&P 500 plunged 22 points from Friday’s highs, then recovered just in time for a well-engineered close: down only 16 points on the day.  More importantly, it closed at 2888.80 – just above yesterday’s 10-DMA at 2888.70 (2888.80 today.)

    After the close, of course, the futures tanked – shedding 14 points before being saved by the usual suspects: VIX, WTI and USDJPY.  Trump’s announcement didn’t come right after the close.  In fact, it didn’t come until after 3 1/2 hours had passed.  Why?That’s how long it took to get the safety net properly positioned.  USDJPY, which had just backtested its IH&S neckline, spiked sharply moments after the announcement.

    VIX, which had just backtested the broken white channel, suddenly reversed and headed lower.

    The overnight action was impressive, with the usual timely plunges when ES faced important tests. How much more of a smackdown will resurrect stocks’ rally?Whether the rebound will hold or not is anyone’s guess.  China has already announced retaliation – which Trump insisted will lead to a $267 billion expansion of US tariffs.

    Futures are under pressure again, and interest rates are threatening to break out on the obvious (to everyone except Trump, apparently) inflation threat that tariffs pose.  Might investors care that the trade wars could, as Jack Ma theorized, last for 20 years?

     

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  • Charts I’m Watching: Apr 12, 2017

    As we noted yesterday, SPX is hanging on by the skin of its teeth to a breakout.  Despite an 18-pt intraday plunge, it recovered by the end of the session thanks to a timely decline in VIX and rally in WTI.  Will it be enough to keep the trend intact?

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    The daily candle is close enough to the yellow channel bottom to call it a save.  But, futures are off several points again this morning. 

    And, VIX is on the rise — likely headed for our target at 16.25 – 16.48.

    But, USDJPY has reached the white channel bottom ahead of the SMA200 and could get a bounce for a few days.

    It will need to clear the 109.75 price level to be of any help.

    I suspect this is all designed to allow ES to tag support on this little red channel as well as the larger red channel.  If it doesn’t hold, the falling white channel suggests another 20+ points of immediate downside.If it holds, SPX should bounce from right here and recover to test the IH&S neckline over the holiday weekend.  Aside from the purple TL, the other key level is the SMA5 200 at 2354.95 — which is very close to the yellow neckline (which has yet to be properly backtested.)  I would want to be long here with very tight stops.

    Here’s SPX with the same falling white channel as ES sketched in.  Clearly, yesterday’s reversal at 2337, which occurred a few points shy of our 2334-2335 target (yellow) was a little premature.  It leaves open the question as to whether the bounce was off firm enough support.

    UPDATE:  10:01 AM

    SPX is struggling to remain above its SMA50.  USDJPY and CL aren’t helping much, though VIX is falling just enough to keep it above the purple TL — now around 2348.80.

    Remember, we have an EIA crude inventory report coming out at 10:30AM.  CL has been steadily approaching the .886 at 54.11 for the past two weeks, and yesterday’s API report was bullish.

    Stay tuned…

    UPDATE:  10:32 AM

    The EIA says crude inventories decreased by 2.2 million barrels.  The bad news, however, is that Cushing is at all-time highs — 69.4MM versus capacity of 77MM barrels.

     

    CL spiked higher for a moment, but is back to its .786 Fib.  SPX is following its lead, and dropping through the purple TL.  I’d revert to short on any drop through the SMA5 100 at 2348.76.

    CL is slipping, and looks like it wants to tag its SMA5 200 at 53.19.  It would be enough to knock SPX off trend, so it’s a little tricky.  If CL drops through the SMA5 200, it’d be quite negative for both CL and SPX.

    VIX is keeping SPX afloat……and USDJPY is still playing its cards close to its vest.

    UPDATE:  10:38 AM

    SPX is slipping below the purple TL, but has so far just head-faked 5 separate declines below the SMA5 100.  If CL gets a strong bounce off its SMA5 200, it’ll set up another head fake.  Even so, it makes me nervous to hold long as it keeps testing the SMA5 100.  Keep your stops where you’re comfortable.

    UPDATE:  10:44 AM

    I’ll probably be right back to long, but I’ll revert to short here.  CL is struggling with its SMA5 200 and USDJPY might not hold its red TL.A drop through 53.29 would be bearish and open it up to 51.6 or lower.

    Note that ES’ red channel has completely broken down.UPDATE:  11:07 AM

    A bounce off the white midline makes sense.  We’ll have to see what happens, thought, when it reaches the SMA5 10 at 2347.80.  If it pushes through, everything’s a go for the SMA5 200 tag and yellow neckline breakout.  If it can’t, then 2334.26 is in view.

    At the current rate, it could reach the .786 without tagging the bottom of the falling white channel — if it’s willing to wait a while.  Note that the channel’s .236 line reaches 2335 a little after 3pm this afternoon.

    UPDATE:  11:42 AM

    ES just reached the midline of its falling white channel, which could provide support even though SPX doesn’t show much.

    UPDATE:  11:58 AM

    Now, SPX has tagged its midline, too.  I’d expect a bounce here, though it could be confined to the SMA5 10 around 2344.  Note, though, the SMA5 200 is approaching the purple TL.  A huge bounce would make that a target — though it seems unlikely.

    CL has broken down below the .786 and SMA5 200.  So, this entire decline feels very much managed/engineered — meaning there’s a purpose and a target which is below current levels.

    UPDATE:  12:09 PM

    12:09 — often a turning point in bounces — and SPX just backtested its SMA5 10.  I’d look for a reversal here, but keep an eye on USDJPY and CL.

    UPDATE:  12:21 PM

    SPX is nudging up through the SMA5 20 on VIX weakness and USDJPY strength.  But, CL continues to falter.  And, VIX has bounced at the SMA5 50 three times in a row.  I’d hold short here.

    UPDATE:  12:51 PM

    VIX is getting a nice boost, but our 16.25-16.48 target isn’t that far off.  SPX should continue dropping, but I’d keep a close eye on VIX and USDJPY, which is testing its SMA5 200 again.

    I have to run a quick errand, will be back in 10 minutes or so.  Watch for TL support at 2341.78, the 1.618 and .786 at 2334.26-2335.34, and the .886 at 2328.65.

    UPDATE:  1:03 PM

    SPX just tagged TL support at 2341.78 and got a nice bounce.  Bears need the bounce to stop right here.  Will CL be satisfied with a backtest?

    UPDATE:  1:14 PM

    Giving it just a little leeway in case the .886 is the target.  My only hesitation is USDJPY, which has pushed above its SMA5 100 again.  On the other hand, VIX has tagged the SMA5 50 for the 4th time.  The fact that it hasn’t plunged down to the SMA5 200 or below tells me this is probably an officially approved and scripted decline.

    UPDATE:  1:40 PM

    SPX is breaking out on VIX’s dip below red TL and USDJPY’s push above the purple TL.  Back to cash until this resolves itself.  Remember, VIX has support at the purple TL and the SMA5 200 around 15.35.  If it drops through the SMA5 200, SPX has a good chance of reaching its own SMA5 200 — perhaps as it reaches the SMA50.

    UPDATE:  2:01 PM

    Feeling pretty iffy about it, but we could get a reversal here at the SMA50 rather than the SMA5 200 as it’s also the white channel .786 line.  Back to short with relatively tight stops.

    Note that ES has fully backtested the red channel.

    UPDATE:  2:10 PM

    Note that USDJPY is back below the purple TL.  I need to run out for a meeting and probably won’t be back until after the close.  I think there’s probably a 50% chance that SPX holds these levels until the SMA5 200 arrives at the SMA50 at 2349.60.  It’s equally likely it reverses between here and there and heads down to 2334 or 2328.  As long as it stays below 2350, I’d want to be short.

    UPDATE:  2:51 PM

    TL support, again.

    UPDATE:  3:20 PM

    USDJPY just snapped, sending VIX surging and CL popping to compensate.  SPX is down to the white midline again, where it could bounce.  VIX might have one more good run in it up to 16.25+; but, they might be looking to close the session at that SMA50/SMA5 200 intersection. I’d want to revert to cash above the SMA5 100.  As usual, shorting overnight should only be attempted by those who can hedge or handle the gap risk.  Watch your stops.

    .

  • One Way or Another

    After allowing a six-session slump (that saw SPX nail our downside target), The Powers That Be can be forgiven for insisting on an overnight ramp job.Last night, it was USDJPY pushing through horizontal resistance, VIX getting clobbered through three separate moving averages, and oil continuing a nice bounce off our 48.63 target.  It should be enough to get SPX up over its SMA10 on the opening bell.

    Since the bounce is mostly about oil’s “recovery,” we’ll focus today on what to expect over the next few weeks.

    Oh, and for those of you who clicked on this post expecting to get their Debbie Harry fix, HERE YOU GO.

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