Oil and the S&P

Since the S&P found a temporary bottom in mid July, its been consolidating upwards while oil has been rapidly falling. The big question now is what is is store for them both over the next few weeks.

Oil broke above $145 around the same time that the S&P was finding a bottom on July 14th. Since then it's fallen an incredible $30 to provide much needed relief to key sectors of the equities market. It's never really clear whether oil and commodities lead the S&P (and the dollar) or vice versa, or whether the two are so inextricably linked it's impossible to tell. But the inverse relationship has been pretty strong in the past few weeks / months.

Reports are saying that demand destruction has caused this potential bursting of the commodity bubble. The dollar has risen too (as a result of commodities easing or in fact compounding the effect). It has broken out of a 3 month channel and has the potential to go higher.

Is this really over for the big oil run? Well if you'd asked me two weeks ago I was betting on the fact that oil would not actually fall beneath the $120 line. It was the kind of call that with the benefit of hindsight would have looked visionary if it was right, but pretty dumb if it was wrong. Now with oil closing at $115 it is not hard to tell how I'm viewing it. Ultimately I still think this oil bubble is far from over - but the size of this retracement has really surprised me.

However, the breaking of that support line does for the first time make it a little easier to see where the S&P and Oil might be heading as a next target. With the $120 line breached, Oil now has the opportunity to go test a couple of major support lines and visit the 200 day moving average for the first time in a year.

Lets look at the S&P first though. Despite all the lingering problems with the financial system, higher oil, a looming recession, the S&P certainly hasn't been trading at a price reflective to the end of the world. I noticed that the S&P had been forming an ascending triangle about a week ago and the picture now looks fairly complete.

This is the ETF SPY which tracks the S&P. To me, it now looks like SPY has closed above resistance for the first time and could go higher. If that continues then a technical target based on the breakout would be around 135 - 137. Also converging in that price range is the falling 200 day moving average, the 50 week moving average and some key Fibonacci retracement lines. The important thing to remember is that we're still in a beark market and therefore this leg is the secondary movement. These are known to be violent and violatile so it may not be a smooth ride there. If the bears gain strength and the market starts falling again, it could be hard and fast.

So if the S&P makes it this higher, what would oil potentiall be doing? Again, two weeks ago I couldn't see how oil could get so low so fast without bouncing. As such, I had thought we might see a rising S&P and rising oil at the same time. This was a difficult conclusion for me i.e. one that I wasn't v comfortable with - but my view nonetheless. However, due to the amazing (to me at least) descent of oil, the path for oil is now cleared of key support to fall at the same time as the S&P rises. The following shows my view on Oil:

At around the $110 level, again we have a converging number of key support lines and also the 200 day moving average. The 50 week moving average lurks a few dollars below. I have a really hard time imagining oil geting much below these lines in the short term and would expect a significant retracement (or even a test of previous highs).

So, will we see 135 SPY and $110 Oil in the near future before a quick and painful reversal back to weaker equities and stronger commodities? The next few weeks should have that answer.