Through The Fly's Eyes: Crude Oil

from Theflyonthewall.com

A Technical View

Given the bearish sentiment in crude it's time to look both at how the crude chart looks (in this case Light Sweet Crude) and how the broader markets (the S&P 500 in this case) have performed while oil rises and falls in value.

Its clear the Crude chart is in technical trouble and has been since September when the curved uptrend line was broken. There is a probable bearish flag in progress as well, a bearish pattern (downside pole shown in red) that has a downside objective to $44 area. In addition the next major probable downside target is at $49.77 (200-week moving average) if the bearish trend continues.

Since Crude started its downtrend the markets have generally outperformed. Perhaps this is due to the belief that as Crude falls, consumers will be under less pressure (more money available for other goods and services) or that Crude as an input for inflation will cease to be such a worry for the Federal Reserve. In the short-run all of that may very well be true.

Over time however it is less clear that falling Crude prices are good for the economy. Our second chart shows Crude with the S&P 500 index below. As we can see, the correlation is not 100%. There is enough of one though to suggest the general market does poorly or declines when Crude declines (an indicator of lower demand and a weaker overall economy) and rises just as sharply when Crude is rising in price (as the economy accelerates). It will be especially important to watch Crude in the coming months as it enters the stronger seasonal period (Spring/Summer) where gasoline is in demand and home heating fuel's (adversely impacted by warm weather in the Northeast) impact on price declines.

Charts created with Equis MetaStock