It's not just gold and silver that appear to be starting new cyclical bull trends, it's commodities across the board. Could this be the start of another 2009-2011 type run? The evidence is compelling.
And the one outlier (for now): Copper
Pardon the poor grammar in the title, but that's the only word that came to mind when I looked at this chart. As everyone in the world knows, crude has been pummeled of late, dropping 75% over the last 18 months. It appears, at least in the short term, that oil has found a bottom. The daily chart, shown above, displays a clear double bottom at $26. Today's rally over more than 5% is further evidence that the bear market has been put on hold, at least temporarily. Something else worth noting is that the 2016 crude chart looks a whole heckuva lot like the S&P 500 in 2016:
Whatever the reason, it sure looks like Oil and equities want to rally from here. I'm not sure which is driving which (or if it even matters), but I do know that with today's rally, these charts are definitely tilted in the bullish direction.
Something else I'd like to point out is the similarities between the current chart formation in crude and the formation from January-March 2015 (both circled below). The latter resulted in a 45%+ rally off the formation lows. If the current rally plays out the same way, then we could see $37-$40 oil before too long. That said, the 2015 double bottom turned out to be a dead cat bounce so caution is certainly warranted this time around.
In today's post, I'm taking a look at the monthly chart of crude oil, going back to 1997. If you read this blog with any frequency, you probably know that I've been calling for $35 crude since December 2014. I don't post on oil too much, but since it's arguably the most important commodity on the planet, I do like to check in on it every now and again. The monthly chart is interesting from a technician's point of view so I thought I'd share what I'm seeing.
I've drawn two long-term support lines on the chart above. The green line, which goes back to late 1998, connects the monthly lows from various market troughs. It has had multiple touches over the years making it a significant psychological area of support. It provided support when the market swooned in 1998 after the LTCM debacle, when the market crashed after the dot-com bubble burst, and yet again when the housing market went bust in 2008/2009. And yet here we are again, in the waning weeks of 2015, watching crude fight for its life on the very same trend line. In fact, if you look closely, crude is now trading below that crucial line. It found lots of support at the line earlier this year, and even managed to stage a feeble rally back to $60, but the weight of supply has proven to be too much. So much in fact, that crude has fallen below the green line for the first time in over 15 years.
The blue line, on the other hand, connects the lowest monthly closes for the past 10 years (as opposed to the green line which connects the absolute lows during the month). While not as long-term as the green line, it still represents a psychological area of support, particularly from it's significance as the the 2008/2009 ultimate low. What I find curious is that the green line and the blue line more or less converge in the mid $40s suggesting that crude currently sits directly on top of multi-decade dual support. Do you see now why it's do or die time for crude? It's already breached the green line and now it's only a couple dollars away from falling below the blue line. If that happens then my $35 prediction will almost certainly become a reality. If the world's most important commodity can't catch a bid, then what does that imply about the global economy as a whole?
As originally predicted in December, and reiterated two weeks ago, crude oil is now on a way ticket to $35. Heavy, persistent selling this morning has pushed crude below its March lows effectively taking out what little support it still had. As a refresher, here's the chart posted back in December:
As you can see, there is no support until you get to the lows from 2009, which are in the $33-$35 area. Technical analysis has been very effective of late, and Crude is a perfect example of this. When it broke its long term trendline as shown above, the measured move placed it in the mid-$30s. Everything has since gone according to plan.
Once crude hits $35ish, I expect a sharp counter trend rally back to the low $40s. From there, it's anyone's guess where this thing goes. If the world economy is indeed rolling over, then crude, the world's most important commodity, will certainly lead the way. Below $35, I'm seeing decent support in the mid $20s and strong support in the high $$ teens (2002 lows). No matter how you slice it, crude is weak and it's only going to get weaker.
Back in December when crude was in the mid-$60s, I posted that, based on the charts, a logical price target would be $35. My argument was that oil had broken a 15 year uptrend and the only point of reasonable support on the charts were the lows from 2008. So where are we now?
After finding an intermediate low around $46, oil arrested its decline and embarked on a three month dead cat bounce. It managed to rally back to $60, but then struggled mightily. I'm sure the rally from $46 to $60 was nothing more than temporary because volume was not at all confirming the move. After 8 consecutive weeks trading sideways at the $60 mark, crude sellers finally overwhelmed buyers pushing the price back down to multi-year lows. As I type, crude is under $46 which puts it right back on the lows from earlier this year. If it closes below that green line on a weekly basis, then there is absolutely nothing stopping it from falling another 20% to $35.
What does it mean for the worldwide economic recovery if the world's most important commodity drops 70% in the span of a year?
As outrageous as that sounds, the long-term chart of West Texas Intermediate Crude (WTIC) is suggesting exactly that. Take a look at the chart and see for yourself.
Here's a monthly chart of WTIC going all the way back to 1995. Connecting the $10/barrel lows from 1999 with the $33/barrel lows from early 2009, you get a long-term line of support. That line was just violated for the first time in crude's 15 year bull run. As I write this, WTIC is trading at $61.36, a clear breakdown from the long-term trend line. Unfortunately for the bulls, the recent decline from $100 has come on increasing volume, a sign that sellers have control of the market. So what next?
As the title of this post suggests, I see the next major support area a full 40% lower that where we are today. This chart shows little-to-no support between here and the lows from the 2008 financial crisis. Perhaps this makes sense given the following two headlines from today:
So demand for oil will be at the lowest it's been in a decade while supply remains the same. Sounds like the perfect formula for lower prices if you ask me.
Keep in mind that this is a long-term chart and that each candlestick represents an entire month of trading. This fall to $35 might take a couple years or more to play out with fits and starts along the way. Regardless, the technicals, along with a deteriorating fundamental outlook, suggest much, much lower prices are in store for crude.
Here's a long term monthly chart of the USO, an ETF launched in 2006 designed to " reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. After collapsing in 2008, it recovered slightly and then has ground sideways for the last six years. Since 2009, it has been neatly bound by a trading range with $29 as support and $42 (more or less) as resistance. For six years it bounced between these levels - that is until November 2014. After briefly piercing below $29 last week, it quickly recovered only to lose it again this morning it was is turning out to be very heavy volume. Volume since the 2009 bottom has been weak but the recent weakness has come on elevated turnover - again, not a good sign for the bulls.
Here's a 20 year chart of West Texas Intermediate Crude, USO's underlying commodity. You can see the same break of intermediate term support that occurred this month which opens the door for continued weakness. Volume has accelerated these past few months adding credence to the sell-off.
I've also drawn the long term line of support dating back to the late '90s. Based on the recent breakdown, I fully expect crude to revisit this support, somewhere in the mid-to-upper $60s depending on how quickly it declines.
In short, I see little relief ahead for oil bulls.