by Dominic . Picarda
Crude oil spread trading. In ordinary times, the typical pattern is for commodities to peak last among the main asset classes. Even in the very extraordinary early phase of the credit crunch, this was the case, with equities topping in 2007 and commodities following later in 2008. Today, commodities – as measured by the CRB index – may have climaxed at the same time as the stock market. The CRB index made a high in April 2011, slightly before US and UK equities rolled over in May.
It is not particularly remarkable that commodities and stocks have moved in sync this time round. After all, both have been driven higher by massive injections of liquidity by central banks over the last couple of years. With industrial activity now slowing sharply around the world, weaker demand for energy and metals threatens to send prices substantially lower.
Thus far, crude oil’s decline has been jagged, rather than the full-blooded sort of drop that we saw in 2008. A jagged decline is a clue to chartists that the drop may be a pause within an uptrend, rather than a genuine downtrend.
Should Brent drop below its 55-week exponential moving average, I will probably speculate on further falls in the price of the black stuff. And I would use that same line – shown on the accompanying chart – to time entries into the market. When the price rallies back up to that line – and perhaps even a bit through it – I would then aim to sell once it reverses lower once more.
As things stand, I do not envisage the sort of collapse in Brent crude that occurred in 2008. However, in an environment of possible recession around the world, a retreat to $80 or even $70 a barrel seems entirely feasible.