Why I believe crude oil has topped
In my post of 12 May The Oil Price Is Suddenly Hot News – Has It Topped? when the price had rallied to a multi- year high of $72, this was the short term chart I posted
and this is the 4-hr chart today
I believe I can remove the question mark now. This chart now shows the first small scale five down pattern that is almost mandatory to demonstrate a major trend reversal.
So how did I arrive at the $70 area as a likely target for the rally from two years ago? To some who believe that the news makes the markets, setting such a pretty accurate forecast so long into the future – when oil was in freefall around the $28 area – is akin to hocus pocus or sheer quackery. After all, who knows what state the world will be in in two years?
Electric vehicles may have taken over, or the global economy may be collapsing, or climate change mandates may have outlawed the use of fossil fuels – I could go on.
Remember that all forecasts are based on probabilities, and I am keenly aware that all of mine are.
This is the procedure I follow when analysing a market – and I would recommend it to serious traders.
My first port of call is the very long term monthly chart that gives me perspective
It includes the massive bull run to the $150 area in 2008 (which has become at least one current target for a prominent bull). Also showing is the savage bear trend off the $100 level to the $28 low in the summer of 2016 when most pundits were predicting a decline into the teens on very bearish ‘news’.
And with that low in place, I could then project an upside target to the Fib 50% around $70. What aided this forecast was my drawing of the lower blue trendline which incorporates a very useful Prior Pivot Point PPP (see my text 52 – 53).
I was able to cut off the extreme plunge to the $28 low and suggest it was an ‘overshoot’ – a feature that usually heralds a sharp trend reversal. The odds were growing for a major reversal then – totally against market sentiment, of course.
Then I move on to the weekly that shows the structure of the B wave
The huge momentum divergence at the A wave low was yet another clue the trend was about to change. Today, the entire rally has a three up appearance, which is counter the one larger trend, which is down.
Then I move to the daily which shows the C wave structure
This wave sports a typical five up to the blue trendline and on a momentum divergence to boot. The 4-hr chart above shows the five down with more clarity.
In two weeks, crude has declined by $7.50 or 10% and this is the kick-off to new lows that should take it eventually below the $28 area in a large C wave.
If this pans out, what are the implications for the global economy and stock markets? Not good.
But stocks are still flying, especially the small caps and tech. The divergences are stunning.
Here is the staid and stolid Dow of the 30 largest caps (that are in the firing line of the tariff wars)
The top was made four months ago and is well down. Here is the Nasdaq tech index (not subject to tariffs)
Again, the all-time high was made in March but the current rally is taking it close. And here is the Russell 200 of the US small caps (mainly domestic US corporations)
These charts show massive divergences, don’t they?
So what is the immediate outlook? With many indexes in full bull mode, I have to say the trend remains up with the Dow as the fly in the ointment. It remains still in corrective mode off the January top and because I use this index as the historical litmus test for the general stock market, I will remain on high alert for a trend change.
Interestingly, Alphabet (Google) – a tech leader par excellence – has just broken hard above the major pink trendlline
If my EW labels are correct, we are now in wave 3 of 5 – typically a very strong wave – and that heralds a re-test of the old highs above $1,220. And that puts the Nasdaq on track for new highs.
But with bullish sentiment running over, it is surely only a matter of time before stocks follow the over-loved crude oil in a sharp decline. Remember, markets top out when things look great!