Crude and the Commodity cycle

Over the years we have written many times about the 34-year commodity cycle. Generally commodities rise as a group in a 13-year bull market, which is followed by a 21-year bear market. Each specific commodity has its own particular cycle which generally fits within the broader 34-year commodity cycle.

A bullish phase of this cycle started about two decades ago in 1998, and ended in 2011. A bear market, lasting about 21-years, has been underway since then. Sorry gold bugs! During the bull market phase some commodities rise in five waves. During the bear market phase all commodities decline in three larger waves. Naturally, just like there are corrections in bull markets, there are rallies in bear markets. Commodities, in general, are currently in one of those bear market rallies.

Crudeblank

When one looks at a Crude chart covering nearly 50-years, one can clearly see two periods of rising prices and two periods of declining to sideways prices. While these rising and declining periods may look sporadic, they are actually quite regular when one knows what to look for. As we will explain in the following chart.

Crude

The two rising periods were actually five wave 10-year bull markets, i.e. 1970-1980 and 1998-2008. These two bull markets were separated by an 18-year bear market, i.e. 1980-1998. The rise during the bull markets were quite spectacular. Well over 1000% in such a short period of time. Price rises like these always lead to excess-capacity events. And these events are normally followed by nearly as spectacular declines. Which eventually cuts capacity until supply/demand reaches an equilibrium. We are in one of those equilibrium periods now.

With Crude 8-years into its bear market, and at least a decade away from starting a new bull market, we can already see a pattern unfolding which is relative to its previous bear market. To see this pattern one needs to review the larger waves first. During the last bear market Crude declined from 1980-1986, rallied to 1990, then declined from 1990-1998. A 6-year decline, then a 4-year rally, followed by an 8-year decline.

Since the current bear market just had an 8-year decline, 2008-2016, we should look into the last 8-year decline. Then the 8-year decline unfolded in three waves [1990]: 1994-1997-1998. Now the 8-year decline has also unfolded in three waves [2008]: 2009-2011-2016. Notice 1990: 4dn-3up-1dn, and 2008: 1dn-2up-5dn, nearly the exact reverse or mirror image. If we consider this a completed pattern, and we do, the next thing that should occur is a choppy 4-year bear market rally, i.e. 1986-1990 or 2016-2020. Therefore the $26 low should be the low for at least the next four years.

How far could Crude advance? During the last bear market all rallies, excluding the aberration from the Kuwait invasion, retraced 38.2%, 50.0%, or more of the previous larger decline. This suggests an upside target between $70 and $85 by the year 2020. Then, after that, a six-year decline into the final bear market low, which should be around the $26 area. In summary one should expect a price range between $25 and $85 over the next decade. Unless there is a supply-event, which could push the upper range higher.

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Tuesday update

SHORT TERM: gap up opening then market stalls, DOW +18

Overnight the Asian markets lost o.2%. Europe opened higher and gained 0.7%. US index futures were higher overnight and the market gapped up to SPX 2192 at the open. The SPX had closed at 2183 yesterday. At 10am the SPX hit 2193, new home sales were reported higher: 645K v 592K, and the SPX hit 2193. Then the market started to pullback. The pullback continued throughout the day into a SPX 2187 close. Fairly quite after the open.

For the day the SPX/DOW gained 0.15%, and the NDX/NAZ gained 0.25%. Bonds lost 1 tick, Crude rose 55 cents, Gold was flat, and the USD was higher. Medium term support remains at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Tomorrow: FHFA housing prices at 9am and Existing home sales at 1oam.

The market gapped up at the open for the first time since August 11th. After the opening the market ticked up a point and then began to pullback. The August 11th gap up led to the SPX 2194 high two days later. It is possible the ending diagonal fifth wave scenario is underway. If correct we have a possible scenario for the five abcde waves: 2194-2169-2197-2183-2200. Thus far only 2194 and 2169 have completed. Short term support is at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Short term momentum was quite overbought at the open then eased back to neutral. Best to your trading!

CHARTS: https://stockcharts.com/public/1269446/tenpp

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Monday update

SHORT TERM: lower open then choppy day, DOW -23

Yesterday FED vice chair Fischer gave a speech: http://www.federalreserve.gov/newsevents/speech/fischer20160821a.htm. Overnight the Asian markets gained 0.1%. Europe opened higher but lost 0.4%. US index futures were choppy overnight and the market opened at SPX 2178, 6 points below Friday’s close. In the opening minutes the SPX hit 2176, then the choppy activity began. At 10:30 the SPX hit 2185, 2177 by 11:30, 2185 again by 12:30, 2178 by 1:30, then ended the day at 2183.

For the day the SPX/DOW lost 0.10%, and the NDX/NAZ gained 0.10%. Bonds gained 9 ticks, Crude dropped $1.70, Gold slipped $2, and the USD was higher. Medium term support remains at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Tomorrow: the new home sales at 10am.

The market opened lower today, hit SPX 2176, bounced to 2185, then remained in that range for the rest of the day. With the narrow trading range nothing has changed with the short term count. It still looks like a medium term high at SPX 2194, or an ongoing ending diagonal underway for the medium term high. Short term support is at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Short term momentum ended the day where it started, at neutral. Best to your trading!

MEDIUM TERM: uptrend may have topped

LONG TERM: uptrend

CHARTS: https://stockcharts.com/public/1269446/tenpp

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weekend update

REVIEW

The market started the week at SPX 2184, rallied to 2194 on Monday, pulled back to 2169 by Wednesday, then rallied to end the week back at 2184. For the week the SPX/DOW slipped 0.05%, and the NDX/NAZ were mixed. On the economic front positive reports continued to outpace negative ones. On the downtick: the NY FED and building permits. On the uptick: the NAHB, housing starts, industrial production, capacity utilization, the Philly FED, leading indicators, the Q3 GDP estimate, plus weekly jobless claims improved. Next week’s reports are highlighted by the Q2 GDP, durable goods and more housing reports. Best to your week!

LONG TERM: uptrend

For the past several months we have been carrying two potential counts for the long term trend. The popular NYSE primary V, and the not so popular, if not unknown, SPX primary B count. In the past several weeks we have added a third count, which we detailed last week: the DOW primary III count. Actually the primary III count, quantitatively, also fits the SPX/NDX/NAZ/W5K. But does not fit the NYSE. The reason we suspect, also noted last week, is that the NYSE reflects more of a worldwide index, with its ADR’s, than a US index.

This week we are moving the DOW P3 count from an alternate to the 50/50 probability SPX/NYSE counts, and giving it an equal probability. This upgrades all three counts to a 33% probability. While all three counts continue to suggest higher prices ahead one in particular stands out.

NYSEweekly

The NYSE P5 count fits better with the foreign indices than with the US market. And it is possible that the P3 and P4 in 2015 and 2016 are actually Major 1 and Major 2 of Primary III. It is not this count.

SPXweekly

The SPX P B count still looks good, but historically it does not fit. Since 1932 there was only one time that a B wave made new all time highs, and that was in 1980 and only by 1%. At this week’s high the SPX was nearly 3% above the 2015 all time high. It is not this count.

DOWweekly

The DOW P3 count is relatively unknown in EW circles. But it fits quantitatively with the NDX/NAZ/SPX/W5K, and is supported by historically reliable technical indicators. It suggests Cycle wave [1] did not end in 2015, and it will not end with a NYSE P5 either. Cycle wave [1] will continue to unfold for a number of years, as Primary waves III, IV and V work their way higher. This is the count that makes the most sense. We caution, however, that the SPX needs to clear 2336 (1.618 x P A) before we will make this count the main count. As always feel free to choose which of the three counts fits your particular views.

MEDIUM TERM: uptrend may have topped

The current uptrend that began in late-June at the Br-exit low appears to have completed five waves up from that low [1992]: 2109-2074-2178-2148-2194. Since the third wave (104 pts.) was shorter than the first wave (117 pts.), we were expecting an even shorter fifth wave. At SPX 2194 it is about 6 points short of a 0.50 x wave 3 Fibonacci relationship. So this one is quite short, but close to our minimum of SPX 2200 +/- 2 points.

SPXdaily

Supporting this potential downtrend underway scenario are the abundance of negative divergences nearly across the board in the major indices. Daily charts in all the major indices are displaying negative divergences in the RSI and MACD. On the weekly charts the SPX/NDX/NAZ are quite overbought. The DOW weekly is displaying a negative RSI divergence, just like it did at the last uptrend high.

Should a downtrend be underway we would expect the market to find support between waves 1 and 2 of this uptrend SPX: 2074 and 2109. This would amount to about a 5% correction from the SPX 2194 high. Medium term support is at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots.

SHORT TERM

While waves 1 and 3 of this uptrend counted quite well impulsively, this fifth wave has been a choppy affair. We have counted from the SPX 2148 wave 4 low: 2188-2172-2194. Then the market dropped to SPX 2169, rallied to 2187, and dropped to 2175. Quite sloppy activity that looks mostly corrective.

SPXhourly

Since the pattern for the fifth wave is not clear it is possible it could move marginally higher to complete an ending diagonal: wave a 2194, wave b 2169, wave c underway. This pattern would likely top around SPX 2200. Or the uptrend actually ended at SPX 2188, and everything after that is part of the next downtrend. Until the SPX actually declines to 2148 again the short term outcome is a bit uncertain. Either way a downtrend is underway, or should be underway soon. Short term support remains at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Short term momentum ended the week at neutral.

FOREIGN MARKETS

Asian markets for the week were mixed and ended about unchanged.

European markets were all lower and lost 2.5%.

The Commodity equity group were mixed but gained 0.8%.

The DJ World index lost 0.1%.

COMMODITIES

Bonds continue to downtrend and lost 0.5% on the week.

Crude soared 10.4% on the week.

Gold is still in an uptrend and gained 0.2%.

The USD is still in a downtrend and lost 1.3%.

NEXT WEEK

Tuesday: new home sales. Wednesday: FHFA housing prices and existing home sales. Thursday: weekly jobless claims and durable goods orders. Friday: Q2 GDP 2nd est. +1.1%, consumer sentiment, and a Jackson Hole speech from FED chair Yellen.

CHARTS: https://stockcharts.com/public/1269446/tenpp

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Friday update

SHORT TERM: lower open choppy day, DOW -45

Overnight the Asian markets were mixed. Europe opened lower and lost 0.5%. US index futures were lower overnight, and the market opened 7 points below yesterday’s SPX 2187 close. In the first few minutes the market dropped to SPX 2175, then began to rally. Around 3:30 the SPX hit 2185, then dipped to close at 2184.

For the day the SPX/DOW lost 0.25%, and the NDX/NAZ lost 0.05%. Bonds lost 14 ticks, Crude added 10 cents, Gold dropped $10, and the USD was higher. Medium term support remains at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots.

The market opened lower today, hit SPX 2175, then rebounded for the rest of the day. After the new high on Monday at SPX 2194 the market has been choppy all week. With negative divergences on the daily RSI/MACD, and the weekly RSI quite overbought, it still looks like that was the uptrend high from SPX 1992 low in June. More on this in the weekend update. Best to your weekend!

MEDIUM TERM: uptrend may have topped

LONG TERM: uptrend

CHARTS: https://stockcharts.com/public/1269446/tenpp

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Thursday update

SHORT TERM: higher open then trendless day, DOW +24

Overnight the Asian markets ended mixed. Europe opened higher and gained 0.4%. US index futures were relatively flat overnight. At 8:30 weekly jobless claims were reported lower: 262K v 266K, and the Philly FED was reported higher: 2.0% v -2.9%. The market opened two points above yesterday’s SPX 2182 close, dipped to 2180 in the opening minutes, then rose to 2186 by 11am. At 10am leading indicators were reported higher: 0.4% v 0.3%. Then after a pullback to SPX 2180 again by 12:30 the market rallied to 2187 by the close.

For the day the SPX/DOW were +0.15%, and the NDX/NAZ were +0.15%. Bonds gained 9 ticks, Crude rose $1.35, Gold gained $6, and the USD was lower. Medium term support remains at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Tomorrow is option expiration Friday.

The market opened higher today, pulled back, and then went into a 7 point trading range for the day. While today did make a higher high than yesterday, the rally from yesterday’s SPX 2169 low looks choppy. Continue to favor the potential for an uptrend high at SPX 2194, although the Minor 1 – 2 posted has not been totally discounted yet. Thursday or Friday of an options expiration often provides a big move in one direction or another. No move today so it could occur tomorrow. Short term support is at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Short term momentum ended the day with a potential negative divergence. Trade what’s in front of you!

MEDIUM TERM: uptrend may have topped

LONG TERM: uptrend

CHARTS: https://stockcharts.com/public/1269446/tenpp

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Wednesday update

SHORT TERM: choppy FOMC day, DOW +22

Overnight the Asian markets were mixed. Europe opened lower and lost 0.9%. US index futures were lower overnight, and the market opened 2 points below yesterday’s SPX 2178 close. The market continued to pullback until 11:30 when the SPX hit 2169. Then ahead of the FOMC minutes the market started to move higher. At 1:30 the market hit SPX 2179. At 2pm: http://www.federalreserve.gov/newsevents/press/monetary/20160817a.htm. Right after the release the  market dropped to SPX 2172, and then started to rally. In the last hour of trading the SPX hit 2183, then closed at 2182.

For the day the SPX/DOW were +0.15%, and the NDX/NAZ were +0.10%. Bonds gained 5 ticks, Crude rose 30 cents, Gold was flat, and the USD was lower. Medium term support remains at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Tomorrow: weekly jobless claims and the Philly FED at 8:30, then leading indicators at 10am.

Today’s continuation of yesterday’s decline eliminated the potential Int. v diagonal scenario quite early when the SPX hit 2172 in the opening minutes. At that time we posted an A labeling suggesting the uptrend may have topped at SPX 2194. We have also posted a less likely Minor 1 with an irregular Minor 2 scenario labeling as well. We were expecting this fifth wave up from SPX 2148 to be the shortest, as the 3rd wave was shorter than the 1st wave. Although not this short. With the characteristics of the uptrend changing, and negative divergences on the daily charts, it would appear a downtrend may be beginning. Short term support is at the 2177 and 2131 pivots, with resistance at the 2212 and 2252 pivots. Short term momentum bounced from extremely oversold to nearly overbought during the rally. Trade what is in front of you!

MEDIUM TERM: uptrend may have topped

LONG TERM: uptrend

CHARTS: https://stockcharts.com/public/1269446/tenpp

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