
Crude oil continues its dissent signaling major deflationary forces… Brent crude under $60… Russia panics!
Yesterday’s action was a wild ride as the market declined 1% and then rallied up 1% only to finish back near the lows at 1972.74, down .85%. This close was below the weekly S3 support at 1973.20. This suggests that the market could decline toward the 1954.30/1952.50 levels. There is some minor support at the 1964.05 level. However, a penetration of this level will confirm this move down to this support.
The market action is déjà vu only this time it is declining and won’t stop going down. For a brief period yesterday crude oil bounced off its lows. In response, the market saw a sharp short covering rally trading as high as 2017 before sliding 45 handles to close at the lows of the session. Most of the negative market sentiment was driven by the close of Brent crude oil at the $60 level. In overnight trading, Brent crude is trading at 59.14, down 1.45% as the onslaught continues.
With Russia panicking the night before last, raising their rates sharply to protect the ruble, there are many that are concerned that they are trying to engineer some sort of controlled default. They don’t have a lot more than the interest rates to try to support their currency which worked fairly well. But the Russians and everyone else are wondering the same thing, “Where’s the bottom in crude oil?”
As I mentioned in yesterday’s commentary, if we were able to close below the $56 level on WTI for the second session, it would signal much lower prices. We’re now looking at a minimum of 52 to 48 on the next leg down. The real question is what happens to the stock market and other financial markets such as high-yield etc. when we reach these levels.
By the close today we will hear from the Federal Reserve and will we hear anything about the general collapse in commodity prices, specifically crude oil and its effects. I think everyone is wondering if the Fed has something up their sleeve to support the crude oil market. They’ve supported every other asset on the planet. Why not crude oil?
But in the end, it’s hard to find anything they could do to support this market. And this is so far out of the box, why would they even consider it? The answer in my opinion is that they will have nothing to say about this particular event other than maybe mentioning a continuation of the extremely low inflation.
There is a lot that can be said about this subject and you can go into a lot of speculation on the details, but in the end it is about what happens to prices. Should crude continue to the 52 to 48 level, it is likely to have further effects on the stock market. The extreme that I can see in the pattern right now is 1937.80/1927.15.
Today will be a pivotal point on several levels. The big news will be around the Fed meeting and also to see where crude oil closes. Unless it closes higher today, I believe the market will continue this downward trek across the board. As we saw yesterday, sharp short covering rallies can occur at any moment and any uptick in crude oil or any sign that there might be an interim bottom will be enough to rally the market back toward the 2020/2040s levels.
Expect continuing volatility as the three-day range indicator is now at 45.61. This is similar to what we saw when the market was rounding from 1820 up to the 2070 levels. This suggests that were likely to see a continuation of these highly volatile sessions trading for the next three sessions as the market continues to probe for some sort of oversold bottom and set up a short covering recovery rally.
The market should open higher, with a 60 percent probability to close higher, should the market remain above the 1964.05 level today.
Today’s Key Levels
|
|
RX |
2018.35 |
|
R3 |
2000.95 |
|
R2 |
1991.20 |
Resistance |
R1 |
1981.45 |
Prior Close |
|
1972.74 -16.89 |
Support |
S1 |
1964.05 |
|
S2 |
1954.30 |
|
S3 |
1944.30 |
|
SX |
1927.15 |