TRADERS´ Blogs

Since the end of last week commodities have broken away from the euro and European stock markets. As you can see in the chart below, Brent crude has started to move higher, while the euro has flat-lined after a sharp fall at the end of last week and Spain’s Ibex 35 is still moving lower.

Brent, EURUSD and Ibex 35

Source: Bloomberg and FOREX.com


During periods of increased market volatility commodities tend to lead a downtrend as they can be expensive positions to hold, and thus can be sold off to fund losses elsewhere. However, now that the oil price has had three days of gains, what should investors make of it? We take a look at three scenarios below:  Source: Bloomberg and FOREX.com This chart has been normalised to show how these asset classes have moved in relation to each other over the last year. As you can see Brent crude and EURUSD have traded fairly closely together from May last year until Dec 2011. However, when EURUSD was stuck in a 1.30 -1.35 range for the first few months of this year, the oil price was much more volatile. Firstly, it recovered strongly, but then it fell sharply as well. In fact, Brent started to decline in March this year, while EURUSD did not start to decline sharply until the start of May. The Spanish Ibex Index continues to be sold off sharply having suffered steady declines over the last 12 months that have accelerated since the start of this year.

1, The Brent oil price may have fallen far enough after dropping $20 since peaking in February. The price is now attractive to investors who are looking for a bargain. Commodities led the market lower, they may now lead the market higher and the price action in this asset class could be an early sign that markets are looking oversold, and buying interest could seep into other asset classes soon. 2, Commodities could be diverging from European assets. While the sovereign debt crisis continues to rage on expectations of stimulus from the US and China are helping to buoy asset prices, thus the oil price could recover even though the euro and European stocks continue to suffer.
3, The oil price might only experience a temporary recovery as a Grexit or bailout for Spain may cause excess volatility in global financial markets and oil would not be immune.  

Technical update on UK oil:

1, $105 looks like a good double bottom and is now tough support. Could it be the start of an inverse head and shoulders pattern? It’s too early to say, we would need to move back towards $109.50 for that reversal pattern to come into play. 
2, For a reversal to take hold we may need to clear $110.00. This is a key psychological level and above here could attract more interest, and could boost momentum for a return to the $115 zone. 
3, RSI and MACD’s on shorter-term charts don’t look oversold so there could be more upside to come.  To conclude, it’s too early to say if this is a reversal in the trend or if it is a pullback, however the RSI and MACD indicators suggest there may be more upside momentum in the short and longer-term. There are some hurdles up ahead including $108.00, $109.50 and then $110.50. Good support lies at $107.00 – a cluster of hourly smas – and then $105.

UK Oil: Hourly

Source: Bloomberg and FOREX.com


Best regards

Kathleen Brooks