After oil prices fell to below $49 a barrel for the first time this year, the prospect of a decline of 40% is plausible, with a probability of about 20% according to the proven adaptive ZYX Allocation Model.
Such a decrease would have the potential to take the stock market down with it.
Please note that this is in sharp contrast to my strongly bearish calls on oil when it was at $108 a barrel. I stayed bearish all the way down to $26, before turning neutral at $29.
Let’s start by looking at the long-term chart of oil. (Please click here for the annotated chart.) Even though most investors use the United States Oil ETF USO, for trading oil, the chart features a continuous futures contract because it provides a better picture. Notice four failures of oil to penetrate the top side of the rectangle marked on the chart.
The latest failure came Wednesday on a U.S. Energy Information Administration (EIA) report that crude oil inventories rose by 8.2 million barrels to the highest level since 1982. U.S. crude production increased to 9.09 million barrels a day. Both of those amounts are significantly more than the consensus before the EIA report.
As of this writing, the oil on the front month contract has fallen to below $50 for the first time since December.
There is a correlation between oil prices and the stock market, which was strongly evident several times in 2016. There are three reasons for this correlation to arise again…Read more at MarketWatch
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