WTI: About time for a bounce?

<p>After starting out on the back foot, so-called “risk markets” have found their bullish stride heading into afternoon US trade. Of course, this weekend’s tragedy […]</p>

After starting out on the back foot, so-called “risk markets” have found their bullish stride heading into afternoon US trade. Of course, this weekend’s tragedy in Paris remains on the forefront of everyone’s mind, but traders are simultaneously looking ahead to the potential economic fallout from the terrorist attacks.

If global consumers are fearful enough to avoid or postpone purchases, there could certainly be a negative medium-term economic impact, but this effect would likely be at least partially offset by easier monetary policy from central banks.

Indeed, ECB executive board member Peter Praet expressed similar sentiments in an interview with Bloomberg TV earlier today. Praet noted that, “Usually these sorts of events have a transitory effect on the economy so this is not a priori a reason to change the way we see the evolution of the European economy” It’s also true on the other hand that we have a fragile cyclical recovery, fragile with downside risk, and it’s clear these sort of events do not help restoring confidence in the recovery, so this is something we will watch.” In a separate interview, the ascendant US “bond king” Jeffrey Gundlach also highlighted that the attacks decrease the probability of the Federal Reserve raising interest rates next month, at the margin.

Turning to the ultimate scorecard (the markets), it appears that the prospect of easier global monetary policy is outweighing the negative economic impact of this weekend’s horrific events. US stocks have turned definitively higher, with both the S&P 500 and Dow Jones Industrial Average trading 1% higher as of writing, while the yield on the 10-year US Treasury bond has dipped to 2.27%.

The most impressive move of the day may be in crude oil. The morning started out well enough for bears, with the West Texas Intermediate (WTI) contract trading down for the ninth (!) consecutive day and testing key psychological support at 40.00. However, the risk-on tidal wave overwhelmed sellers starting at 11:00 ET, and WTI has now rallied to test 42.00, up nearly 5% from the lows and 2% from Friday’s close.

While it remains to be seen whether WTI can hold onto its gains, the daily chart is currently displaying a Piercing candle*, showing an intraday shift from selling to buying pressure. Meanwhile, WTI remains deeply oversold, with the slow stochastics indicator still below the 20 level, so there could be room for a more substantial bounce this week. If we do see a meaningful bounce emerge over the next few days, the key barrier to watch will be 43.50, which is a major previous-support-turned-resistance level. It seems logical that any counter-trend rally could stall out around the area, and bears who missed last week’s breakdown may welcome a second chance to sell so-called “black gold.”

*A Piercing Candle is formed when a candle trades below the previous candle’s low, but buyers step in and push rates up to close in the upper half of the previous candle’s range. It suggests a potential bullish trend reversal.

WTI11-16-2015 2-43-55 PM

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.