Crude Should Begin to Stabilize

Below I plot the ratio of the Nikkei vs. crude in the top pane and crude alone in the bottom pane.

Over the past ~30 years the ratio b/t the Nikkei and crude has traveled in a downward sloping channel b/t lines (1) and (2).  Moreover, every time it has hit line (1) resistance (Nikkei out-performance peak), crude has been at a major, absolute price low upon which large rallies have ensued.

As a result of the WH’s and Obama’s financial warfare against Russia (explained here in great detail), crude’s massive decline into early 2016 once again saw the ratio climb up to line (1) resistance – only the fourth time in ~30 years that this resistance has been hit.

2016-08-02 Ratio - Nikkei vs. Crude with Crude - Weekly

Subsequently, right on cue, just as the ratio was hitting line (1) resistance above, crude was forming a significant, absolute price low itself.  Off that low into its peak last month it managed an incredible 90% rally.

Below is an analog that details how crude has traveled off each of the weekly lows above.  For the two rallies that were more moderate vs. the one off the 1990 low which ripped 140% and flamed out quickly (red plot) – those being the rallies off the 1988 (blue) and 1998 (green) lows –  the gray shade shows that the current juncture of the rally where we find ourselves post 2/11/16 low (black) has tended to mark an important pivot point whereby crude either stabilizes or begins a new launch higher.

2016-08-02 Crude - Rallies off Lows when Ratio of Nikkei vs. Crude Has Hit Resistance - Analog - Daily

Here is what the move off the 2/11/16 low looks like vs. the average of the three previous rallies; the correlation of the current plot vs. the three others is spot on and again, suggests we are at a reasonably precise pivot point.

2016-08-02 Crude - Rallies off Lows when Ratio of Nikkei vs. Crude Has Hit Resistance - Avg - Analog - Daily

Moreover, if we look at a long-term chart of crude on a monthly basis, we find that it’s recent losses have brought it back down to major long-term support.

It is important to highlight that crude has only managed to print below this support 2x going back into the early 2000s – and both were very brief at that – with both being multi-sigma historical outlier events in terms of the the GFC in 2009 and the other the aforementioned financial warfare against Russia earlier this year.

As it re-tests this long-term support it appears to be putting in place a bullish, inverse H&S pattern that it could spring out of.  In addition, the re-test here looks an awful lot like crude’s long-term support re-test coming off its 1998 lows.

2016-08-02 Crude - Monthly

As suggested, the price action in all of the above suggest that crude, at a minimum, should have a good chance of stabilizing in the near-term and that the potential for a larger advance should not be ruled out either.