In the power-trader newsletter, we’ve been talking about the move lower in crude oil, and the correlation with the uptick in the U.S. Dollar. Today, crude oil broke below a very important trend line / rising channel, indicating further weakness in the commodity.
Let’s start with the US Dollar, Symbol NYBOT_DX.
There is clearly an underlying effect on commodity prices from the recent large move in the US Dollar. Starting at December 31st, the US Dollar closed at $77.9. With a current price of $79.49, the overall price movement is $1.59. Since the mid January lows, the US Dollar formed a bull flag, and broke out to the upside. This pattern creates an overall price target of $81, for an overall price move of $3.10.
Taking a look at crude, you can see clearly how the rise in the US Dollar has caused a reversal in crude prices. On December 31st, crude was trading at around $80, and is now trading at $72.67, or -$7.33. Comparing that to the $1.59 move in the US Dollar, you get a $4.61 move in crude for every $1 move in the US Dollar. Based on bull flag projections in the US dollar of $81, there is still another $1.51 move left to go, projecting crude to move another -$6.96.
Taking 6.96 from the current price of 72.67 puts crude at $65.71. This level matches up almost perfectly with the 50% Fibonacci retracement level drawn from the February 2009 lows. The Fibonacci 50% retracement level is known as “Thin Air”, where price begins to run into significant difficulty. Hence, $66.02 to $65.71 is our first price target
Taking another look at crude, we can see price broke below a very strong positively sloped trend channel. The height of said trend channel is a $11.13 move. Using trading rules for trend channels, we can now project another price target of $61.54 for crude oil
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