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posted on 03 October 2016

Oil Is The Most Important Chart To Watch

by Pebblewriter, Pebblewriter.com

In our last update [see: Aug 30, 2016 Update on Oil] I noted that CL (Light Sweet Crude Oil Futures) had bounced prematurely, leaving the channel it had broken out of without a backtest. It was at 46.20 at the time.

pebblewriter380px

…the delay left the falling white channel without a backtest… To further complicate things, DX and USDJPY just broke out. Is it possible the yen carry trade is being resuscitated and CL will be allowed to decline further?2016-08-30-cl-daily-cu-1600

If so, then we’ll likely see it drop down to 43ish over the next several weeks (the red dot in mid-September) to tag the white channel bottom and, potentially, the white .618 Fib at 43.07.

As it turned out, the yen carry trade was resuscitated. USDJPY rallied over 4% between Aug 26 and Sep 2. This left CL free to decline without seriously dinging stocks.

CL did more than backtest the white channel by mid-September. It dropped through the channel top, tagging 43.07 (actually 43.00) only two days later. As expected, it got a tremendous bounce at that point - gaining 11% in the next week.

Not surprisingly, not one client complained that the forecast came together so quickly! But, the rapid rebound left me with a charting quandary. By coming when it did, the bounce left CL without a solid tag of the rising channel from Feb 11.

Fortunately, there was a solution: another tag on Sep 20 - this time at 43.06. By coming back for another swipe at it, the rising channel bottom was tagged, too. With that nicety out of the way, the next rebound was even more impressive: 13.8% as of earlier today, when it tagged our 48.64 upside target from last week [see: Don’t Worry, Be Happy.]

2016-10-03-cl-60-1500

For those who’ve played along in CL, congratulations. You’re up about 35% (unleveraged) in the past five weeks alone. This, on top of the 120%+ that came since our Feb 11 bottom call [see: USDJPY Finally Relents.]

For those who haven’t, I encourage you to give it some thought. Charting CL has been easier than charting equities - especially since I came to understand that CL was being used as a tool with which to drive equity algos.

With that said, let’s look at the path forward. Today’s high marked an incredibly important inflection point. Where it goes from here will likely be the most important determinant of equity prices for the remainder of the year.

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