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Oil And The Next Big Rally

Summary

Crashing oil prices could lead to an even more explosive rally.

Prices tend to form major bottoms at the tail end of years that end with an eight (1988, 1998, 2008/9, 2018/9?).

We could see oil bottom in Q1 2019.

There are many calls for a new bear market in stocks; I don’t see it just yet. In my opinion, several pieces of the recession puzzle are out-of-place. Nevertheless, the bearish dialog encouraged me to go back and reevaluate the charts. In doing so, I uncovered an interesting observation in oil. Higher oil prices along with rising interest rates trigger most recessions. But before oil spikes to recession-level highs, there is almost always a washout period (like now). If this pattern repeats, oil should bottom in Q1 2019, and potentially begin a 300%+ rally lasting 18-24 months.

Moreover, oil tends to form major bottoms at the tail end of years that end with an eight (1988, 1998, 2008/9, 2018/9?). The 2008 bottom arrived in early 2009. Each time prices bottomed at or just below the monthly Bollinger band (red ovals). From there, prices enter a sharp 300% advance.

Note: The 2007 washout low in oil didn’t arrive in an “eight-year,” but it still preceded a recession. Prices bottomed below the Bollinger band at $50.55 and rallied 291% in 18-months. That was more than enough to thrust the economy into the “Great Recession.”

Current Thoughts: I believe oil will continue lower (maybe a bounce here or there) and reach a final low in early 2019. We will know more after Thursday’s OPEC meeting. The current breakdown in the CRB supports this outlook. From the 2019 bottom, I think oil could enter an explosive rally lasting 18-24 months. Surprisingly, the rallies out of 8/9 lows were very close percentage wise (339%, 346%, and 342%). A similar 340% rally into late 2020 holds the potential for a $130+ oil prices - depending on where we bottom.

Of course, this is all speculation, but I think it’s worth further examination. If the 8/9 Oil Phenomenon repeats, the prepared investor could earn some serious profits. When the time comes, I’ll look to buy UWT, ERX, and 2021 calls options/spreads in XLE.

AG Thorson, CMT

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.