Crude Oil: Expecting An Imminent Daily Cycle Low

Summary

• Crude oil dropped alongside equities last week.
• It is due a daily cycle low.
• We continue to see higher prices in this broader intermediate cycle.
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Although crude oil and equities have traded in a highly correlated fashion over the past while, crude oil has yet to print its first daily cycle low in its broader intermediate cycle. Both crude oil and equities printed their intermediate cycle lows on the 24^th of December last year. Monday, the 25^th of March, will be the 59^th trading day of this broader intermediate cycle in crude. Crude oil topped out at $60.39 per barrel on the 21^st of March last. Considering how late we are in the daily cycle, last Thursday's top should mean the beginning of crude's daily cycling decline. It could be short and swift.

On the weekly chart, we can see that this crude oil is starting its 13^th week of its intermediate cycle this week. Many long-term investors use the crossing of the 50- and 200-week moving averages or as shown the 10- and 200-week moving averages as either buying or selling signals. As we can see from the chart below, the steep decline we had in crude oil at the back end of last year actually resulted in a crossover of the weekly moving averages. However, the sheer thrust of the rally since then negated that crossover as we have the 10-week once again above the 200-week moving average (buying signal).

On the monthly chart, we have a monthly swing low and also at least a yearly cycle low also. Why? Because the last clear yearly cycle low in oil took place in June 2017. This means that the recent December low took place 18 months afterwards, which was a stretch to say the least. Therefore, considering the long timing band plus the sheer thrust of the rally out of the December low, we believe it will be only a matter of time before price takes out that 10-month moving average. When it does (this will be another buying signal), we will have confirmation of a brand new yearly cycle which started in December.

We have been monitoring both the CRB and equities for that matter in an attempt to gauge whether there is a possibility of both of these asset classes retesting their December lows. For example, many bears still believe that the recent December lows in stocks came too early which may be correct to a certain perspective. The CRB though for that matter cycles over a 3-year cycle whereas equities cycle over a 4-year cycle. Therefore, since commodities bottomed in early 2016, they were definitely in their timing band for a 3-year cycle low last December as shown on the chart below. Obviously, we need a convincing break of the 10-month moving average before we can confirm the CRB's 3-year cycle low. However, it looks highly probable (considering the strong rally over the past 3 months) that the 3-year low is in.

One word on fundamental analysis. It is obviously very important, but as chartists we believe that market action discounts everything. This basically means that any current fundamental event, such as OPEC cuts or US sanctions on Venezuela, has already been reflected in the charts. This is why we focus our research on price and chart patterns. Reasons why crude oil may rise or fall is secondary in our analysis.

Why? Because if the supply and demand situation changes drastically, this new trend will show up on crude's price action on the charts. We believe the fundamentals are bullish for oil as the commodity continues to make higher highs. Any potential negative piece of fundamental analysis concerning crude oil is secondary to crude's price action. It is all about supply and demand. If demand remains strong, price will continue to rise. If it is the contrary and the negative fundamentals gain the upper hand, price will fall off.

To sum up, asset classes many times print hard bottoms together. We continue to believe that we had this scenario play out in December of last year with crude oil and equities. Considering the high correlation we have seen between equities and crude oil over the past while, some fear seemed to enter the market when stocks, for example, fell over 60 handles last week in one trading day which again pressurized crude oil prices. From our research though, we continue to believe that all we had was some profit-taking in both asset classes. Let's see if crude oil can close above 10-month moving average over the next few weeks which will confirm its sustained rally.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.