Crude Oil: The Most Important Chart in the World

NYMEX:CL1!   Light Crude Oil Futures
Crude oil is the only chart that matters again.

  • Momentum is currently to the downside, below the 200d moving average having sold off from $50 in early June

  • The first key support level is near at 41.88 ( 38.2% retracement of the Feb '16 - June '16 rally)

  • Should this fail, the next major support level is 35.84 ( 61.8% retracement of the Feb '16 - June '16 rally)

  • If the market finds support at either 41.88 / 35.84, then the 'reflation trade' is back on and targets a rally towards 59.72 eventually ( 38.2% retracement of the May '11 - Feb '16 decline)

  • If the market fails to find support and trades down through 35.84, then the 'reflation trade' is seriously challenged (perhaps reversed) and targets a decline below the February 2016 low of $26.05 ("$20 oil" scenario)

As a driver of global macro trading, the next move in oil is vital for several reasons;

  • According to a publication by the Atlanta Fed earlier this year, $40 crude would realise the Fed's 2% inflation target by year-end given the concealment of rising core measures by falling energy costs in headline CPI as a product of the decline in oil

  • In the meantime, core inflation has remained firmly above 2% whilst oil has almost doubled from the February 2016 low

  • Whilst YoY oil is virtually flat, the base effect of higher crude will really transpire in early 2017, assuming core inflation remains stable (it may even rise, and after all, is underestimated by econometric models e.g. "Shrinkflation")

  • In a negative / low yield world, there is currently little margin for inflation in bonds. If the above scenario plays out, expect the inflation risk premium in bonds to adjust sharply (yields higher)

  • The Fed has all but conceded 'stagnation', and the majority of investors still dont see a single increase in rates until March 2017 (according to implied probabilities from futures ) - evidence of complacency and consensus

  • Put simply, the bond market is being prevented from accurately pricing this risk due to policy intervention from Central Banks artificially suppressing yields and equity volatility . This could all change in 2017

The most probable scenario is a rally off 41.88 support, although I would not rule out a test of 35.84 - either way, I am looking to use crude as an indicator for the reflation/deflation theme over a 9-12 month horizon. I believe that the reflation theme remains valid, but will be challenged by a break below $42, and possibly reversed (deflation) below $36 longer-term.

For further insight and discussion please contact me via Tradingview or LinkedIn, on Twitter @James_LVDTA, and visit http://www.lexvandam.com to become a member of our Trading Club.
Comment: Just below 39 seems to be the new level to watch for a potential pivot (50% retracement)
Great analyze. You should take into consideration the fibs of the second impulse wave as well. We have the 200 SMA very close at around 41$ as well. If price is able to break below all this resistance, next thing would be to look for a correcting below this cluster of resistance. If so, the market sentiment would be considered negative for sure. If we stay above the cluster, and are able to break above this spring's top, I think we are looking at 60 as the new long term target, as a lot of fundamental analysts think as well for the time beeing looking into 2017.
RationalTrader RationalTrader
JamesHelliwell RationalTrader
Nice! Thanks for your comment. Given the inventory data yesterday and a lack of a strong investment case for either the bulls or the bears currently, I believe it is increasingly likely that we will see the 38.2% ($42) level rejected, ushering a test of $37 on the downside. Should we trade lower, but not reach this level (say 50% instead) then a confirmatory close above $41.88 would indicate that the correction is done which would provide the signal.
Similar conclusion but with a different end ;)

Very interesting thesis. I've been playing with the same thought (oil price being a driver for inflation/deflation), but your wording makes much more sense than my thoughts... :) Thanks for sharing!
You're welcome. Glad it made sense and afforded some insight. Hope it helps.
After this mornings price action where do you think we go?
Its a weekly chart for a reason - a few ticks on any given day aren't going to challenge or confirm a major, globally important trade. From my detailed analysis it should be clear that (at the time of writing) momentum is to the downside, with 41.88 the initial target below the spot price.

Inventory data due today which is more important than yesterday's intraday noise. However, current correlations mean that oil is trading tick-for-tick with the dollar (strength), so I would be more focused on that if I were watching intraday charts.
Nice view. Have a look at Brent chart. Its classic bearish one.. rising trend lines breached followed by a bearish break from falling wedgehttps://www.
JamesHelliwell TipTVFinance
I will be on the show Friday to discuss! See you then
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