After EIA’s modestly bullish inventory report came out, yesterday, WTI dithered for a moment before heading higher. I was prepared to throw in the towel on our 42.11 downside target when its rally reversed at the exact price it needed to in order for me to quickly regain my confidence.
The yellow arrow marks the Head & Shoulder Pattern‘s neckline that we laid out last week [see: Oil’s Dangerous Game.] Three hours later, we bagged 42.11 and saw CL reverse as expected. The bonus: it led SPX right to our downside target for it, as well.
This completes a pretty nice short that tested us over and over again with three separate head fakes, an aborted bounce on a channel line, and another on the neckline.
Do the fundamentals support a big rebound here? Nope, not even close. But, fundamentals have paled in significance to technicals and chart patterns for over a year. And, if I’m right and central bankers get their way, they will continue to do so.
continued for members…
Stripping away all the Fibs, TL’s, etc. we’re left with a clear picture of why CL should bounce strongly here. The channel, of course, is pretty obvious. But, more importantly, if CL continues to slide we’d be left with a very significant YoY drop in the energy complex.
If our theory discussed in last week’s Big Picture holds, CL will take over algo-driving from USDJPY, and will lead whatever rebound SPX is likely to see starting right here. 
I’d be long here, assuming VIX is backtesting the broken red channel and not rejoining it. 
If all goes according to plan, we should see SPX test the SMA10 at 2436.49 and keep going — ideally to at least the purple midline, which should be around 2441.27 by the close.
Traditional channel behavior would call for a reversal there or the channel’s .786 line up around 2450 and a subsequent drop to the channel bottom — something like the chart below.
Of course, SPX could continue down to the intersection of the .618 and yellow channel midline today (2430.13. ) It fell just short yesterday, reaching 2430.74 vs 2430.13. There is a little tension between competing channel lines, here.
I’d keep an eye on VIX and USDJPY. If VIX tops 11 and USDJPY drops through its SMA200 at 110.85, then it’ll be a pretty strong signal that 2430 is in play. There’s no reason to get nervous until it drops through 2427, about where the purple channel bottom currently is. For right now, I’d put an alert at around 2433.50 and consider closing on any drop below there — or else be prepared to ride it out.
I’m still under the weather and only got 2 hours of sleep last night, so I’ll sign off for now. SPX might zig and zag, USDJPY might hold off dumping, and CL might take its time rebounding — but I’d want to be long oil, short USDJPY (with relatively tight stops in case it breaks out) and nervously long SPX at this point.
GLTA.