crude oil – bottom looks to be in place

Reasonably bullish signs have emerged in the price of Crude Oil, the latest chart signals seem to indicate that support at 2 year lows near $76-$77 per barrel has been found. Not only was price support tested, but slowing momentum was obvious in the form of a long-term positive divergence. It is always good to see corroborating technicals align bullishly and that’s exactly what we saw with crude oil prices. Take a look:

After a long-term positive divergence prints on a daily chart, I look for a test of the 50 day SMA. Many times this coincides with a centre-line test, or MACD “reset”. As you can see above, crude oil surged very close to its 50 day SMA and the MACD is currently rising and approaching a key MACD centerline test and reset. A long-term positive divergence doesn’t have to mark a long-term bottom, although many times it does. What happens after this 50 day SMA test is critical technically. The printing of a higher low and a later breakout above $89 per barrel would signal not only higher crude oil prices, but also resumption of the S&P 500 uptrend. Alternatively, a breakdown beneath $76 per barrel would indicate slowing global demand, which in turn would likely send the S&P 500 spiraling down close to 1200.  Currently, I’m banking on the former because of the longer-term bullish backdrop.

In addition to the short-term bullishness, the longer-term 5 year weekly chart is also arguing for higher equity prices in the days and weeks ahead. Crude oil prices and the S&P 500 tend to move together over the medium term (even though this is counter-intuitive as Oil price rises are deemed to be inflationary and so problematic for equties). Crude oil prices move higher in anticipation of greater global demand. Higher demand usually results from strengthening global economies. Strengthening economies normally produce higher corporate profits, which in turn send S&P 500 prices higher. Take a look at the fairly tight correlation between crude oil prices and the S&P 500 on this chart:


Swen Lorenz: