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Crude Oil Breakdown

Wed, Nov 7, 2018 - 8:23am

Originally posted on Topdown Charts.

There are a couple of charts here from our Global Cross Asset Market Monitor (weekly markets monitor that goes to clients).  Key point: WTI crude oil prices are breaking down. On the technical side, we've got a double top here and a downside break of the 200-day moving average, which leaves the logical support level down around 40-50.  So there could be as much as another 20 percent to the downside as this move unfolds. I covered the downside risks to crude oil in a recent edition of the Weekly Macro Themes report where I highlighted the mix of futures positioning, US dollar strength, negative seasonality and supply growth as headwinds - as well as the bearish action in energy stocks - with our earnings sentiment tracker flagging warning signals.

BONUS CHART: the bonus chart is crude oil implied volatility (think of this as the VIX for oil).  While the oil price is breaking down, crude oil volatility is breaking out - this is very much consistent with the move in the oil price and is the kind of thing you see at the start of a major move (a spike from relatively low levels).  At some point this spike in crude oil volatility may become a contrarian buying signal, but not yet! 

The price action in crude oil is really important, not just for oil traders or those who allocate to commodities, but because the oil price has an impact on a few different assets e.g. S&P 500, U.S. HY credit, breakevens, and treasuries. Indeed, if oil falls far enough and fast enough it could be a catalyst to further risk-off price action in U.S. asset markets.

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