$150 Oil to Crash Stock Market on Monday
Note: As you may have noticed, I enjoy writing catchy headlines…
Yesterday, I wrote about “bear flags”, and that analysis was a smashing success. So today, let’s examine a bull flag. Take a look at this chart of the USO oil ETF (click to enlarge):
Notice prices tracing out a flag pattern (or you could call it a pennant) which I have bounded in red. Now look down at the volume. The “flag pole” was a high-volume move, and the flag itself is a low-volume consolidation.
This is a classic bull flag!
The completion of this pattern-in-progress would see prices running up an equivalent magnitude of the flag pole. The pole began around $100 and ran up to about $113, so another $13 would be the target for USO. On the futures contract, that would take us up to $150-land.
I don’t trade commodities because I don’t have an edge on the fundamentals as I believe I do on the broad stock market. However, this is such a perfect pattern that I just might pick up a few USO shares.
Flags are short-lived patterns. This thing could break out at any moment. If it does, stocks will suffer, and my short positions will rocket even higher. So, I will benefit from a breakout in oil, and I don’t need to play this directly. However, if there is another move down to the low end of the range around $107 on light volume, I might be tempted to jump in.
Note: The bear-flags that I wrote about yesterday all broke down on high volume today. That is very strong proof that the trend for the stock market is still down. And if you add that to this scary oil bull-flag, you have a recipe for a mini-Armageddon. Perhaps the world will end early next week since expiration should keep things pinned down until then. That would also give stocks time to move sideways and work-off their over-sold condition.
My strategy for the near-term is to short the hell out of any bounce in stocks.
Yesterday, I wrote a post titled “Bear Flags Flying!” Today, Barron’s picked up the theme with “The Bears Have Left Their Caves” - make sure to take a look at Michael Kahn’s QQQQ chart. Here’s a quote:
“Stocks are in a bear market and technical indicators confirm that sellers are more aggressive than buyers.”
Indeed!
June 19th, 2008 at 1:44 am
Hi Matt,
I couldn’t agree more. Oil is in a very bullish uptrend and can kill the stock markets any time. Very explosive mixture.
June 19th, 2008 at 4:52 am
Matt:
I am not so sure about this in the very short-term (next 3-4 weeks), however beyond that Oil would probably continue its bull-run.
But again, I have been proven wrong on this. Tried shorting Oil a couple of times. Thankfully, I had tight stops, so very minor damage.
I decided then that I would rather be long Gold. Besides why be obsessed with shorting Oil when you got so many other things you can short with impunity?
- SK
June 19th, 2008 at 6:38 am
The flag is a good indicator for higher prices BUT, you have to pay attention to divergences. I see a possible negative divergence developing between the price of USO and the MACD, PPO and stochastics. That would make me a little wary of a long USO position, for instance. Just something to think about.
June 19th, 2008 at 7:55 am
Dressguard, yes, “explosive” is a good word for it.
John, I see what you mean. However, that same case could have been made with the peak on April 25th: higher prices, but not a higher MACD. Perhaps oil can pop, wreck the stock market, but rack-up the MACD divergence, and then collapse as the market crash puts the final nail in the demand coffin.
SK, I used to love to try and short things that I thought were over-priced too. In 2006, I was short real-estate, but couldn’t hold on until the bubble burst. I was so close! Now, I follow the Wall Street adage of “never short a chart you can’t ski” and life is much easier. Once oil rolls over, the shorting should be great fun as the price “skis” down the huge price mountain.
Matt
June 19th, 2008 at 1:18 pm
This comment is from SK. I accidentally hit the spam button on it. (You never see the spam because I delete them all.)
SK wrote:
“I actually did short real-estate, financials, mortgage insurers etc. over a year ago through LEAP Puts. And yes, there was a time where I was looking at 30%+ paper losses.
A year later, absolutely fabulous returns. (Short positions: WM, CFC, PMI, MTG, C, TOL, BSC, LEH…….the list was quite extensive.)
Currently, getting short on technology and will use upcoming rally to short indices.
On a lighter side, Kramer’s four horsemen (or horses) are soon going to roll over.”
June 19th, 2008 at 1:21 pm
Hi SK,
How are you planning to short tech? I’m have a large QID position now, along with a few QQQQ puts.
Matt
June 19th, 2008 at 3:11 pm
A $3 hit in oil triggered an explosive rally in airline stoks today.
I am agnostic on oil short-term.
But am quite convinced the next MAJOR move will be down.
And heaven help the shorts when that happens.
June 19th, 2008 at 3:58 pm
Matt:
Short on Tech by identifying parabolic run-ups and purchasing long-term Puts on them - typically 6-12 months out. To optimize the costs, one can think about out-of-money options.
Crimson:
Oil will probably correct sharply - to about $100-$110, and market may rally sharply on it. However, I’ll take the opportunity to short the indices. Reason is simple - some of the indices (such as S&P) have not shown sharp declines in earnings/dividends due to energy. Once oil corrects, the earnings will also correctly sharply.
Secondly, credit crunch has not gone away. Consumer spending is slowing dramatically, and $100+ oil is still much higher than what US economy can handle during a vicious recession.
If oil falls to $100 or so, I plan to go long on it. Just wait till that attack on Iran facilities, and we’ll see oil back above $150 in matter of days.
Full Disclosure: No special knowledge, just speculating based on news reports. I expect the attack around July-end/August after we see the sharp decline in the price of oil.
- SK
June 19th, 2008 at 3:59 pm
Crimson Ghost,
Oil down almost $5 and the S&P 500 up a whole 5 points? Not exactly a disaster for the shorts, right?
Matt
June 19th, 2008 at 4:30 pm
Also Crimson:
Note that there are a large number of funds which are hugely long on oil. Any sharp correction in oil, and you’ll see these funds hit with the margin calls. And they’ll have to sell other assets to cover those calls.
Not exactly a good recipe for rally.
- SK
June 19th, 2008 at 7:22 pm
If oil goes down big, it might be a precursor to a move down in the entire market. Oil might be the tip off that the deflationary spiral is kicking in. That is what the weakness in the markets even with oil dropping is telling us today. If oil stays where it is even with deflation kicking in (unlikely, but it could become a safe haven like gold, or both could temporarily correct severely), things will get uglier than even I am seeing them. Long term trend for oil is up, even with a deflationary collapse, but oil and commodities in general could see a pretty severe correction short to medium term.
June 20th, 2008 at 11:38 am
OPEC meeting on the weekend will be very frustrating for the equities bulls. Oil production will be unchanged. On top of that, Israel trying to bully Iran could kindle the spark for oil to jump over $150. My guess: more than 50% likelihood oil will set a new all time high record next week.
June 20th, 2008 at 3:43 pm
The USO chart is still strong. It gapped-up today and then held the gap; that’s strong action.
Matt
June 23rd, 2008 at 8:02 pm
[...] market failed to crash today as I predicted last week in “$150 Oil to Crash Stock Market on Monday.” Was I crazy to predict such a thing on a specific day? Of course, but what do I care? I [...]