Never Easy to Predict, the Price of Crude Just Got Harder

Earlier in the month, I wrote an article pointing out that gold and copper typically move ahead of oil. It's true, the leads and lags between these three entities differ from cycle to cycle. However, since gold momentum turned up in early 2023 and copper in early 2022, it seemed it was time for energy to follow suit with a rally of its own. Hence the green question marks in the lower right-hand side of Chart 1. In this case, it might be time for an energy rally, but was it likely?

Based on an initial assessment, the answer was "no", because the crude price had completed and broken down from a 4-year head-and-shoulders top. In addition, it had also slipped below its 65-week EMA. Nevertheless, it was also evident that there had been no downside followthrough following the initial break. Since the short-term KST was in a bullish mode, the possibility of a whipsaw signal was definitely in the cards.

Chart 2 shows that's exactly what happened, as the price confirmed with a break above the dashed green down trendline. It also jumped back above the 65-week EMA, but is currently trading below both the EMA and extended line, suggesting that the upside break will also turn out to be false.

When a false upside break takes place, one of two potential outcomes usually happens. In one scenario, the price regroups and digests its gains in a controlled manner. It then successfully rallies to a new high, resulting in the false break becoming a temporary interruption in an on-going rally. An alternate outcome is that the whipsaw is for real and is followed by an above-average decline as traders scramble to get back to the right side of the market. Under this scenario, it is important to look for additional technical evidence apart from the false break itself.

One possibility in the current situation would be a drop below the extended red breakdown trendline. That would increase the odds slightly, but the strongest benchmark would unfortunately be a new Friday closing low, since that would re-confirm the  series of declining peaks and troughs that began in late 2023. In the meantime, a rising short-and intermediate-term KST hold out the prospect that this week's weakness may be followed by a re-grouping process.

Chart 3 is constructed from daily data and focuses on a more recent period. It offers a good example of confirmation of a whipsaw signal. At the beginning of this year, the price experienced a false upside break, which was confirmed when it broke below the dashed red trendline. In reality, this was really the neckline of a consolidation head-and-shoulders.

This week's false upside break has already been partially confirmed with a negative 200-day MA crossover. However, more conclusive evidence would come from a downside penetration of the dashed red up trendline and solid breakdown trendline at $63.

The stakes are clearly quite high since the Special K has tentatively broken above its signal line and the 2023-2025 resistance trendline. If the price can now re-group following its false breakout, that would most likely validate recent Special K action. On the other hand, if the false upside break is for real, the long-term bullish signal triggered by the Special K would be invalidated and prices headed substantially lower.

Crude Oil vs. the Inflation Group Index

I think the inflation/deflation stakes in the financial markets could be at an inflection point right now.

In that respect, Chart 4 features my Inflation Group Index (IGI) and compares it to the oil price. The IGI consists of several industry sectors that are sensitive to commodity prices. As a result, its major swings are not that much different than those for the oil price. Both have been in a corrective pattern since 2022, but the IGI is starting to break to the upside. If it proves to be a valid breakout, such action will undoubtedly be followed by a bull signal from the current tightly balanced KST. The vertical lines flag subzero KST buy signals which, since 1996, have all been followed by higher oil prices.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.