Higher Oil Means Less Money To Spend

| About: The United (USO)

Will he, or won't he? Will Fed head Ben Bernanke raise the Fed Funds another ¼ point or will he stand pat? Maybe he'll stand aside. Maybe he'll change his wording to, "…expect future increases".

Then again, does it really matter?

Because there are many other stimuli currently influencing the markets including news of BP's shutdown of the Prudhoe Bay oilfield in Alaska and the tensions in the Middle East.

I’ve been talking a lot about the Middle East and, by extension, oil, so let’s take a look and see whether the price of crude is confirming the ‘bullish’ news (or if the bullish news is warranted by the charts)?

Chart 1 - Bullish Crude Oil [click to enlarge]

The chart of Crude Oil has been showing text book action. A breakout from a triangle formation (green lines) in late June and subsequent re-test in late July. The re-test looks successful and the MACD and RSI have turned upwards. The next level of resistance comes in at the July high of $79.86 (blue line). A break above that high brings $90 oil squarely in focus.

Will it happen? The market is certainly acting as if it will. But why speculate, we'll find out soon enough.

One thing's for sure: the public is conscious and well aware that higher priced oil means less money to spend.

Chart 2 - 30-Year Bonds (top) Dow Jones Industrial (bottom)
[click to enlarge]

The 30-year Bond recently broke above resistance at 108.5 as interest rates moved lower. The bonds are undoubtedly saying that a combination of weaker than expected job numbers, housing, retail and now, higher oil prices are all signalling an economic slowdown.

Interestingly enough, each low in bonds preceded the corresponding low in the Dow by roughly 1 month (blue lines). If this correlation continues it will signal that the Dow will break above resistance at 11200 - 11300 by early September.

We have a perplexing situation: a rising oil price combined with an already soft economy is causing the stock market to rise. What gives?

The answer is that the markets are celebrating: "No More Rate Hikes; Thank You Mr. Bernanke!"