It’s been two months since oil and gas reached our downside targets [see: Throwing the Game.]  Since then, WTI (CL) has bounced 36.4% and RBOB has bounced 30.6%.  CL has plowed through several upside targets since then, finally reaching our 57.48 target last Wednesday.  As we’ve discussed, it’s not just the chart patterns that suggested a reversal.  It’s also the economics of higher oil and gas prices which, as Trump reminded OPEC this morning, threaten the low-inflation narrative which makes a dovish Fed stance possible.

We’ll take a look at whether this top is likely to hold and what the implications might be for inflation and interest rates.

continued for members…

First, the rest of our charts….then, I’ll be back with commentary.

ES is closing in on its .786 Fib at 2812.13.  This is a logical turning point only because we had no meaningful reversals at any of the other usual suspects – namely the .382, .500 and .618.

Note that the .886 at 2875.15 is located at the top of the falling white channel. SPX’s .786 is at 2813.72. Our yield curve model is still indicating danger.  But, as we’ve discussed before, downturns from breakouts aren’t immediate.  The once which occurred in September took about 3 weeks to play out.  We’re at 3 weeks now.Nothing new on TNX and ZN.  We’re still due for a jolt. AAPL is showing signs of life, with the .382 still the most likely target — looking better thanks to positive comments about its buyback program by Warren Buffett. Nothing new here, but VIX remains in the driver’s seat.  A drop through horizontal support would easily get ES/SPX up to their targets.  Note that our downside target is easily in reach now. VIX has lower targets available.  This is simply the bottom of the small red channel where it intersects with the bottom of the falling yellow wedge.  It’s also the .236 line of the larger falling red channel based on the 2015 and 2018 highs.

The currency picture is still being helpful to stocks, but offers few attractive trading setups. I might feel differently about it is DXY were to backtest the broken falling white channel or USDJPY were to break out or down. I see a good possibility of a drop to 109.56, but it’s not much of a move considering the risk of the inevitable pop in the event stocks begin to falter.

UPDATE:  12:56 PM

ES is coming up on important support here: the SMA5 200 and the red TL from last week.  We should see a bounce here if it’s going to.  If so, VIX should reverse somewhere below 14.33.If it doesn’t hold here, the next closest support is at the SMA10 at around 2765.80, followed by the SMA200 currently at 2749ish.

 

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Now, on to oil and gas…

CL has a choice to make between fleshing out the rising purple channel or the less aggressive rising white channel.  Note that its SMA10 is just below this morning’s low at 55.38 (rising roughly 0.40/day) and lies just below the .382 at 55.56.

CL can push slightly below it and tag the purple channel bottom today (55.18), or it could wait until tomorrow and accomplish roughly the same thing.  The SMA10/.382 seems like a gimme. What about after that?  Is CL ready to break down?A breakdown of the purple channel would mean it’s targeting 51.48-51.52, the intersection of the white channel midline, the SMA50, a .500 Fib and the yellow channel .236 line.  Note that the .500 Fib in this case doesn’t belong to the same system as the .382 above, but the larger downward facing grid between the 26.05 low and 76.90 high.The yellow channel line is a very prominent point, seen here on the weekly chart.  CL dipped below it in November in order to force CPI below then current levels.  Now, it’s back above it and has already backtested it several times.So far in February, EIA reports WTI prices at an average of 53.68 per barrel.  If it remains at this level, it would represent a 13.7% drop from Feb 2018 prices.  This compares to 19.3% drop YoY in January.  In other words, the YoY decline will have dropped — suggesting that PPI would flatten out or at least decline more slowly. PPI is currently bumping along at important support.  Total PPI is in danger of dropping below 2%; though, core has room to fall before reaching levels that would likely cause the Fed concern.  CPI is already below 2%, reaching 1.55% in January.

As we’ve discussed many times, RB is the more relevant input to short-term changes in CPI.  It’s currently averaging 2.193 for February — which is 11.9% below 2018 levels.

In January, the YoY drop was 13.1%.  So, again, current prices would represent a smaller YoY drop — a decline or flattening in the rate of decline, which would mean CPI bottoming out or at least slowing.

At current levels, the Fed has no excuse to raise rates any higher, which is in line with Trump’s objectives.  So, why the public message to OPEC?  Clearly, RB broke out of its rising channel on Feb 15 — when SPX needed help getting past its SMA200. In so doing, it also pushed up through the midline of the falling yellow channel from Aug 2017 — the midline it’s currently backtesting.  If the point of the drop was to remove some of the froth from February’s data, I think it has probably accomplished that.  If the point was to prevent any further gains that might cause a rebound in CPI, it has likely also accomplished that.

If we look ahead at March’s range, we can see that the average price per the EIA was about the same as Feb — even though the price charts for CL indicates a slight potential increase… …and for RB indicates a large potential increase.If it holds initial support at its SMA100 (1.5609), then it’s likely to continue gaining in order to maintain the sort of YoY gains we’ve seen in recent months.  It needn’t do so in March, which had little MoM change in 2018.  But, if it maintained current pricing, the YoY change would be about -17.3% for April, -21.90% in May and -21.73% in Jun.  It wouldn’t register above -20% again until November.

Bottom line, either RB rallies by or during April or we’d probably see CPI drop below 1%.  I see no need for oil/gas prices and CPI to drop appreciably lower unless it’s in conjunction with a planned decline in stocks (e.g. construction of a right shoulder for a IH&S, or a politically motivated general bear market.)  Otherwise, it would do more harm than good.

From a tactical standpoint, I would revert to long in CL at the channel bottom (55.18.)  If it dips below 55, it presents additional downside potential to 51.66 or so, but could overshoot to the SMA20 at 54.53 and still bounce back to maintain its upward trajectory (in other words – the muddy waters.)

For RB, I’d want to be long anywhere north of the SMA100, but be prepared to revert to short on any drop through it, targeting the purple channel midline around 1.4910.  A drop through the midline would target the SMA20, currently at 1.4734.

We’ll keep an eye on both as additional price and economic data come out.