If History Repeats Itself, The Markets are in Trouble

As a technical trader, I usually don’t spend much time talking about market fundamentals. However, there are some underlying forces that can never be ignored when doing market forecasts. Clearly the price of crude oil has had a profound effect on the stock market over the past 5 years.

That said, I though it would be interesting to analyze the effect of crude prices on the S&P 500. Specifically, I wanted to highlight the price where crude oil became so expensive that the markets could no longer sustain their rally.

The Effects of Exorbitant Crude Prices

It took me a while to find historical prices for NYMEX crude that I could correlate with levels on the S&P 500. Eventually, I ended up writing a little excel script that filtered the data for me. In the end, I was able to create this chart.

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You can clearly see that $70 crude oil caused the markets to slow down, eventually creating the tell tale double top. Once crude crossed $90 per barrel, the S&P 500 crashed through the 1400 support level, and the rest is history.

Crude Oil Forecast

A few days ago, I watched an interesting video forecast for the direction of crude oil over the next few months. The most interesting point I took away was that the normal fall season dip in crude prices hasn’t occurred. In fact, crude oil has taken off lately. Take a moment to watch the crude oil forecast, and then I’ll show you what’s happened over the past couple of days.

Ok, so in the video you saw that if crude were to break $75, that prices should take off. We’ll let’s take a look at what’s happened since then:

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The first thing that should jump out is the solid breakout through the $75 barrier that we’ve been running up against since June. We see triangle pattern that began either at $46, 54, or $60. Price targets for a confirmation of the triangle pattern would be $90 for the $60 breakout, $96 for the $54 breakout, or $104 for the $46 breakout.

Taking a look at the fibonacci retracements for crude, you can see the 50% is at $95.69, and $107.45 for the 61.8% breakout. To me, I would be setting my target at the $96 area at this point in time.

Could this be the straw that finally brings down the market?

My comparison of the S&P 500 crash to the rise in crude oil prices is clearly a very simplistic cause and effect relationship. Certainly there were other factors involved, but there can be little doubt that crude oil played a key role in the collapse.

Many traders, including myself, have been expecting this market to come down. I’ve been trading a small amount of my portfolio with a bullish bias, but at this point I’m minimizing my risk to the upside. I believe higher crude prices will have a deep impact on the markets, and I’ll be watching the $90 mark very closely.

If I begin to see signs of topping in the S&P 500, or its’ key components, I will move to an optimistic bearish bias, but will use fairly tight stops on any trades I make until key price levels indicate further bearish movement.

I hope you have found this post insightful, and I look forward to your comments.

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