Stock Market and Crude Oil at Critical Trading Levels

By: Adam_Perl

Over the last couple of months we have been witnessing the outcome of constant aggressive monetary policy. The Fed has used all its weapons to try to keep the U.S economy out of recession, but at the same time they have spurred inflation. With a current fund rate of merely 2%, the Fed has found itself between a rock and a hard place, combating deteriorating economic growth accompanied by accelerating inflation.

Similar to previous trading weeks, last week was characterized by high volatility, with Crude oil taking center stage. From a high of $147.31 to a low of $128.95 per barrel, crude sparked major movement across the board as it dropped, sending major indices rallying. Even though this black gold was in need for a major correction, it seemed to be very convenient that prices experienced major declines following the Fed's statement, insinuating that the U.S economy is facing significant growth risks, which could affect consumption. Is the Fed using yet again one of its famous tactics – affecting market prices by issuing statements about the future, trying to put a lid on commodity consumption, or is the economic slowdown, which has been affecting all sectors, finally starting to take its toll on commodity prices? The selloff in crude immediately started a snow ball effect, as traders closed their long positions transferring their money to an oversold equity market. Taking a glance at a crude oil daily chart, one can see the extreme sell off which sent crude plummeting, breaking major trend lines.

* Charts courtesy of stockcharts.com

One has to remember that one of the main factors preventing the Fed from answering the markets with further rate cuts are the current high prices of consumer goods, with crude oil at the top of the list. If the Fed can bring down inflation levels with “no-cost” actions such as issuing statements, returning confidence in the markets, money will surely find its way back into riskier assets, seeking high returns. Especially, as many of those assets will start to yield positive returns and not real negative returns, due to 5% yearly inflation.

Even though I am sure that most of us today have stopped fantasizing about $70 or $80 per barrel of crude, if commodity prices manage to retreat to more tolerant levels, the commodity market will lose its attractiveness as traders will search for new trends.

Looking at the overall picture, the financial markets are currently trading at critical levels:

• Major equity indices have formed classic reversal patterns but have yet to break down trend lines.
• S&P 500 (SPX) is facing major resistance which was once classed as major support.

• The housing sector received its first signs of relief on Thursday, as housing starts (yearly) and building permits both beat expectations.
• The financial sector (XLF) is trading around 2003's lows, which was the bottom of the 2001-2003 mild recession- this will surely have a psychological affect on the markets.
• Even though the financial sector is showing continuous losses, individual reports from certain financial institutes like City Group are publishing less horrifying results, lifting market spirits.
• The VIX should be observed very carefully as a weekly chart shows that the fear in the markets are around previous high levels, area that have tended to lead to an equity bounce.

In addition, from a technical point of view, a major trend line was broken and recent candles could be indicating to a turn in trader's sentiment.

Even though the points stated above are showing only the positive aspects of recent market occurrences, one must not forget that the markets are not out of the deep water yet and investors should not be surprised if they hear more incidents like Freddie Mac and Fannie Mae. In addition, there is one factor that continues to remain a major burden on the U.S economy: The U.S dollar.

Despite the steep drop in oil prices last week the U.S dollar finished the week with mild gains of only 0.38%. As mentioned above, it will only take additional bad headlines to re-insert fear into the markets, sending investors back into the commodity sector, especially as the Dollar is having trouble to recuperate and is still low valued. While the last couple of trading days have been spirit lifting, defensive trading is considered to be the best strategy in a volatile market.

By Adam Perl

I am a currency strategiest, I have over 6 years of personal experience trading stocks on the American stock exchange and the Foriegn Exchange. I am also a private trader and coacher for the financial markets. I am also launching a website over the summer.

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