My forecast conclusions are for the oil price bear market to have made it’s final bottom BY early February 2016 and embark on a bull market that will target a trend towards a late year high of $60…This oil price trend and the stock market’s oversold state are also converging towards a stock market bottom…for 2016 in a time window that probably runs for another 2-3 weeks. [Here are the specifics.]
My forecast conclusion is for the crude oil price to trade within three distinct trading ranges for 2016:
- $20 to $40,
- $35 to $50 and
- $62 to $40.
Furthermore the trend pattern imposed onto the trading ranges implies that:
- a bottom is likely by early February 2016 at around $25,
- followed by a trend higher into Mid year towards $50,
- a correction into September,
- followed by a trend towards $62
- before succumbing to a correction during December
- to target an end year price of approx $48 as illustrated by the following forecast graph.
The bottom line is that the current oil price collapse is a wake up call to all major oil producers that crude oil as an energy source is running out of time so, whilst there may be future oil price spikes, the long-term trend given the likes of climate change, is for the oil age to go the way of previous ages such as the Stone Age and Bronze age…[That’s why nations such as Saudi Arabia, regardless of price, understand they need to get as much of their oil out of the ground as possible and sold off before they run out of customers!
Crude Oil Implications for the Stock Market
…A falling oil price is definitely a net economic boom for most major western economies given the fact that their level of oil consumption tends to be far greater than production and thus a falling oil price acts to cut import bills and boost consumer spending… Against this we have the negative impact of oil sector companies in distress that ripples out to other sectors that act to destabilize the financial markets i.e. precisely what we have been witnessing so far this year.
[It should be noted firstly that]…there is a strong correlation in swing between the oil price and the stock market but not in trend i.e.
- if the oil price is swinging lower then the stock market usually also soon starts to swing lower, as the oil price tends to lead the stock market swings. Also it’s not a case of “if the oil price falls today then the stock market will also fall” as same day direction only tends to occur about 50% of the time.
- Conversely when the oil price is swinging higher then the stock market will tend to swing higher. Of course this is not a iron cast 100% rule for at the end of the day it is just one supplementary inter-market indicator.
The goldilocks oil price range for stocks appears to be between about $112 and $75, a range that we are unlikely to see… for the whole of 2016, so [that] implies relative weakness for stocks.
Secondly, a falling oil price is a net positive for the general stock market up to a point and that point appears to be around $40, below which stock market investors appear to lose some touch with reality and perceive the drop below $40 as the harbinger of economic and thus stock market catastrophe. This actually does have some fundamental basis i.e. loss of demand due to loss of economic activity and implications for the heavily indebted energy sector pulls the general stock market indices lower.
Where the stock market is concerned $40 appears to be the KEY level, below which we see what we have been witnessing in terms of trend weakness…The closer the oil price gets to attaining $40, [however,] the more calm we are likely to witness and strengthening trend which, given my forecast for an oil price low by early Feb 2016, implies that we are now within a 2-3 week window for the stock market to bottom out…so we are probably in for bumpy ride over the next few weeks. [However,] one needs to watch for deviation from the oil price trend forecast as a harbinger for stock market strength or weakness going forward i.e. $20, or even $10 is going to result in very bloody stock market chart. (…[Please] bear that in mind…that the trend forecasts are the conclusions of what I deem to be the most probable following in-depth analysis and not some prophetic utterances from a man-god deity.
Stock Market Quick Technical Take
What jumps out form the above stock chart is that the recent bounce was off the August low…The decline into the low was pretty severe which technically means it’s unlikely to hold which means that the stock market is in a larger corrective pattern [than] that [which] began…[at] the May 2015 high…Additionally the MACD is in the process of bottoming out from an extreme low which also confirms that further downside is very limited.
The Bottom Line
The bottom line is that the oil price trend and the stock market’s oversold state are converging towards a stock market bottom that should carve out a final bottom for 2016 in a time window that probably runs for another 2-3 weeks.
Whilst it is probably not going look pretty i.e. the last low of 15,500 looks likely to break. Given the oil price trend forecast it should form the end of this stock market correction and herald the resumption of the stocks bull market.[The original post written by Nadeem Walayat (marketoracle.co.uk) is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – sign up in the top right corner) in an edited ([ ]) and abridged (…) format to provide a fast and easy read.]