Crude and Dollar Speculation
Crude oil prices are making headlines again, rising to another record high. It’s at the point where it’s impossible to say where the top is, but if you trade crude oil or other commodities, keep your eye on the U.S. dollar for clues.
Crude Oil
Crude oil has seen a string of record highs, and rose to a record above $115 a barrel in early trade this morning on the heels of three higher sessions in a row. On Wednesday, the market got a lift after the Energy Department reported an unexpected decline in U.S. crude-oil inventories of 2.3 million barrels. Gasoline supplies dropped 5.5 million.
Crude oil is trading in the territory where it’s difficult to gauge where it will go, and even technicals may not help. Is it economics, or speculation? Personally, I think it may be speculation as we head into summer driving season. I am watching $112 in the May futures contract as near-term support, then the 10-day moving average near $109 - $110. The 20-day moving average comes in at $106.60. If you keep your eye on the dollar, it will help you trade crude oil. Watch the U.S. Dollar Index futures. If the front-month futures fall under 71.20 or 71 on a closing basis, I think crude could take off to $120.
And accordingly, watch the euro too. Some analysts are calling for the euro to hit $1.60. If the Federal Reserve continues to lower rates (which it is expected to do by a quarter of a percentage point at the next policy meeting April 30), it should put more pressure on the dollar. But there is inflation. If the Fed starts talking tougher about inflation and ends its easing cycle, watch for the Dollar Index futures to rally and move above 73.50. Then crude oil should back off at least to $100.
S&P 500
Let’s also take a quick look at the stock indexes and technicals for the S&P 500 futures.
The June S&P 500 futures closed substantially higher Wednesday and above 1334.60, the 20-day moving average. Momentum indicators, the stochastics and Relative Strength Index (RSI), remain slightly bearish, although may be turning up after Wednesday’s gains. However, I see this week’s advance as a corrective rally within an overall bearish trend, and see the market in a neutral zone. Watch resistance around 1370. I'd be surprised if the market can close above 1372, but anything is possible in this wild and volatile market. Closes above 1369-1370 should take the market up to 1391. Major support comes in at 1310.
We are in earnings season, so the market could be volatile. Stock indexes are down in early trade after less-than-inspiring earnings from Pfizer Inc., Merrill Lynch & Co. and CIT Group Inc. In addition, the latest economic data was mildly bearish. New jobless claims rose by 17,000 to 372,000 last week, the Labor Department reported, while continuing claims rose 26,000 to 2.9 million. The Philadelphia Federal Reserve reported manufacturing activity declined in its region, as its general economic index fell to the lowest level since 2001 at -24.9.
Good luck and good trading!
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.
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