Market Overview

Crude Oil to Drop 10%?

U.S. equity markets, currencies and commodities alike, have been trading very wildly, most bearish, during Thursday trading session. Some of the market swings came from the 25 basis point rate cut by the European Central Bank to 1 percent, in-line with estimates. However, most of the volatility came during ECB's President Mario Draghi press conference afterwards.

Draghi stated that he did not foresee further bond purchases. He went on to say that comments he had made last week might have been misinterpreted. Draghi explained that current treaties made debt monetization illegal, and the ECB was forced to respect the legality of these agreements.

These comments in-turn caused equity markets and commodities like gold, crude, RBOB, and copper to all fall on heavy volume.

Since the end of September, crude oil has been trading in a fairly tight channel. The commodity gained 37% from the October low of $74.95 to the November high of $102.89.

However, during Mario Draghi's press conference, crude broke below $100 per barrel and below the bottom of the three-month channel. Market technicians consider this break below $100 per barrel on heavy volume as a pivot point in the market, which can be interpreted as a bearish move.

While this break below $100 per barrel on heavy volume is definitely a bearish move, though, most technicians would like to see consecutive closes below this significant psychological level, to avoid whipsaws.

For the bulls, the commodity is still trading above the 200-day moving average, which is also a significant technical level, and usually is a gauge for bullish/bearish sentiment; i.e. trading above the 200-day moving average is bullish, and given the benefit of the doubt until proven otherwise.

With the current break of $100 per barrel, the next major level of support comes at the 200-day moving average, currently trading around $96 per barrel. If this level is broken, there is no major support left until $90 per barrel, where crude oil will likely settle.

A drop from $100 per barrel to $90 is obviously a drop of 10%. But the charts are not the only thing hinting at a possible drop. China is noticeably slowing. Manufacturing slowed down in world's second-biggest economy in November, as the index that tracks purchasing managers' activity in the manufacturing industry slid to 49 from 50.4 in October, representing an economic contraction in the sector.

China's manufacturing sector drives a lot of demand in commodities like crude oil and copper when the country experiences major economic expansion. However, many analyst's are cutting their estimates on China's GDP growth for 2012.

Currently, crude oil is trading down 2.15% at $98.33 per barrel.

ACTION ITEMS

Bullish

If you think China will continue to slow; consider the following:

  • As China's economy slows, they will have less demand for industrial commodities, so consider shorting the United States Oil ETF (NYSE: USO) or the iPath Copper ETN (NYSE: JJC).
  • If the economy slows more than expected, than Chinese stocks will likely suffer. You might want to consider going short the Global X China Industrials ETF (NYSE: CHII).

Bearish

If you think analyst's are wrong and China will grow more than expected; consider the following:

  • If the economy grows more than expected, then other developing nations, like India, should also see better than expected economic growth. You might want to consider going long the iShares S&P India Nifty 50 Index (NASDAQ: INDY).
  • If China's economy grows more than expected, they will have more demand for industrial commodities, so consider going long the United States Oil ETF (NYSE: USO) or the iPath Copper ETN (NYSE: JJC).

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Posted-In: News Futures Technicals Commodities Global Economics Markets Trading Ideas Best of Benzinga

 

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