Since QE3, West Texas Crude is down over 7%. Huh? When Central Bankers print money, commodities are hypothetically supposed to increase in value due to the fact they are quoted in dollars. Then why isn't crude oil rocketing higher? I want to take a look back at the past years of crude oil to determine what impact QE I, II, and Operation Twist has done to the price.
Lets start with the first chart here of West Texas Crude in the year of 2009.
As you can see, crude oil marched higher 100% when the stimulus and first QE was announced. As more dollars are printed, commodities such as crude increase to adjust for those dollars.
Here in 2010, crude oil traded very sideways along with the rest of risk assets until Ben Bernanke announced QE2 at the Jackson Hole meeting on August 30 of the year. Crude would go on, make a bottom around $70/barrel, and climb higher through the rest of the year making a $92 high.
Again, more dollars being floated around must be adjusted in the commodity markets such as crude.
Last year, with downgrade's and European debt problems looming, crude oil still managed to increase in value. Operation Twist was announced in the summer of 2011, leading to another bottom in crude around $75/barrel, to march higher by over $25/barrel.
The pattern between 2010, and 2011, was QE events in the summer, and a simultaneous bottom in crude to rally higher.
Now we have this current year. Crude oil began the year around $100/barrel, to drop to $78/barrel this summer. Of course, QE3 was announced on September 14, and yet crude has dropped to around $93.00/barrel. What gives? If this year proves out to be like the rest, crude oil should be rallying this fall to climb to its old highs of this year around $110/barrel.
Yet, as of today, the technicals are looking bearish. The solid red circles are representing a break of key technical indicators such as its 50-Day Mmving average and the important MACD indicator. Usually when you have a breakdown in these signals, it suggests prices will at least pullback 5%, to even correct more then 10%. In April of this year, we see crude oil breaks the 50-Day and its MACD to head lower by more then $20/barrel! That is a good correction of over 20%.
So how do you trade it now?
You must get above the critical 50-Day moving average, and see a breakout convergence on the MACD, exemplified by the green circles on the above charts. If we do get a breakout in the near-term, I believe investors and traders should buy crude, and ride it like the other QE years until we see a retest of $110/barrel. As of right now, the charts say stay on the sidelines. This year, crude might be telling us caution is ahead on the QE trade.
Disclosure: I am long VXX.