Crude Oil Collapsed Below $100PPB - Has The Fed Broken Inflation? (Technical Analysis)

Jul. 15, 2022 10:38 AM ETDBE, RJN, JJE, JJETF, USO, DBO, USL, BNO, OLEM, OILK, USOI, OLOXF, OILX, IYC2 Comments
Chris Vermeulen profile picture
Chris Vermeulen
2.25K Followers

Summary

  • As prices rise, consumers are put under extreme pressure to keep their normal standard of living.
  • As inflationary pressures continue, consumers make necessary sacrifices to manage their budgets – often going into debt in the process.
  • Eventually, this cycle breaks, and inflationary trends end.

Rising prices and positive percentage price changes of Brent Crude Oil, Natural Gas and Heating Oil on a trading screen for commodities.

Torsten Asmus

On Tuesday, July 5th, Crude Oil collapsed very sharply, down over 10% near the lows, in an aggressive breakdown of the price. The $97.43 lows reached that day were more than -14% from recent highs (set on June 29, 2022) and more than -21% from highs set on June 14, 2022.

Consumer Discretionary Spending Likely To Fall Further

In a recent research article (published June 9, 2022: Crude Oil Price And Consumer Spending – How They Are Related), we shared a similar breakdown that took place in Crude Oil in 2009 and how tightening consumer spending often correlates with peaks in Crude Oil when crisis events happen.

Within that research article, I shared this chart highlighting the collapse in the Consumer Discretionary sector that preceded the downward collapse in Crude Oil. The interesting facet of this chart is we can see the inflationary price pressure in Crude Oil (and the general economy) countered by pressures put on consumers in the lower IYC price chart.

Consumers Lead The Global Economy – Watch IYC Closely

As prices rise, consumers are put under extreme pressure to keep their normal standard of living. As inflationary pressures continue, consumers make necessary sacrifices to manage their budgets – often going into debt in the process.

Eventually, this cycle breaks, and inflationary trends end. This is clearly evident on the chart below in July 2008 – as IYC, the Consumer Discretionary sector, collapsed by more than 27% before Crude Oil finally peaked and broke downward.

Crude oil daily chart

Since November 2021, IYC Has Fallen More Than -37%

This current Weekly Crude Oil & IYC Chart shows IYC has collapsed by more than -37% from the November 2021 highs – well beyond the -27% collapse in 2008 that preceded the 2008-09 Global Financial Crisis event. Is the current collapse in IYC a sign that a broad global crisis event has already begun to unfold beneath all the news and hype? Will Crude Oil collapse below $75ppb as the global economy shifts away from inflationary price trends and bubbles burst?

Crude oil weekly futures chart

The Deflationary Price Cycle Is Not Over Yet

If IYC falls below $55 in an aggressive downward price move, I would state the risks of a global deflationary price cycle (or extended recession) are still quite elevated. Currently, the $55 price level in IYC aligns with early 2019 price highs and reflects an extended price advance from the $12~$15 IYC price levels in 2008-09.

If the $55 IYC price level is breached to the downside, I expect the $37.50~$40.00 price level to become future support – as that price level reflects the COVID-19 event lows.

Still, these lower price targets represent an additional -32% decline in IYC and reflect a total of a -57% collapse in the Consumer Discretionary sector from the November 2021 peak levels. The potential target range of $37.50~$40.00 correlates with the 2008-09 GFC collapse range when IYC fell from $18 to lows near $8 (nearly -57%).

We are still very early in the shifting deflationary cycle phase after the US Fed started raising interest rates.

In today’s market environment, it’s imperative to assess our trading plans, portfolio holdings, and cash reserves. As professional technical traders, we always follow the price. At first glance, this seems very straightforward and simple. But emotions can interfere with a trader’s success when they buck the trend (price). Remember, our ego aside, protecting our hard-earned capital is essential to our survival and success.

Successfully managing our drawdowns ensures our trading success. The larger the loss, the more difficult it will be to make up. Consider the following:

  • A loss of 10% requires an 11% gain to recover.
  • A 50% loss requires a 100% gain to recover.
  • A 60% loss requires an even more daunting 150% gain to simply break even.

Recovery time also varies significantly depending upon the magnitude of the drawdown:

  • A 10% drawdown can typically be recovered in weeks to a few months.
  • A 50% drawdown may take many years to recover.

Depending on a trader’s age, they may not have the time to wait nor the patience for a market recovery. Successful traders know it’s critical to keep drawdowns with reason, as most have learned this principle the hard way.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Chris Vermeulen profile picture
2.25K Followers
I am an internationally recognized market technical analyst and trader since 1997. My BAN (Best Asset Now) trading system beats the #SPX by 600%. Through www.TheTechnicalTraders.com/ my mission is to help clients boost their investment performance while reducing risk exposure and portfolio volatility. Through years of research, trading and helping thousands of individual traders and investors around the world I designed an automated algorithmic trading system indicators for the S&P 500 index which solves investor’s biggest problem related to the stock market - the ability to profit in both a rising and falling market. My focus is to educate individuals on how to swing-trade indexes, stocks, ETF's, precious metals, and energy.

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