This week looks set to see a lot of volatility, where the earlier part is probably going to be largely driven by equities and Chinese capital markets which might in turn largely be driven by the PBOC. The latter part of the week is then pretty likely to be driven by the result of Thursday’s OPEC meeting in Vienna which Bloomberg has good coverage of. Most interesting is the split in decision forecasts between production maintenance and cuts to shore up prices. The split does right down the middle. Seeing a lot of volatility here will probably rely a lot on derivatives and options hedging in particular. After all, if you’re well-hedged, then there is probably not a reason to rush for the doors as soon as the market goes against you a bit.
What is more important is the signal: does OPEC show that they’re willing to deal with lower prices and lower profits to maintain market share and relevance, or do they decide that the production cuts that ensures marginal profit is upheld, at the risk of losing geopolitical influence and lowering the petrodollar trade?
It will be difficult to tell either way (as the analysts prove) but the market reaction is at least expected to be spectacular. Let’s look at a bit of a technical view of where the market is currently positioned ahead of any production decision by OPEC on Thursday.
West Texas Intermediate Crude Oil:
The last time oil went up 3 days in a row? June! Surely it sparked prices a little bit higher but after that it was free-falling, especially since September. One of the major problems shown here is the monthly EMA, forcing a rejection on Friday and having significant price action decision power (yellow arrows indicating similar situations in this down-move). Crossing over the 21 EMA due to, say, an OPEC decision to cut, implies the next target could be the 63 EMA, which will then be below US$85 and not provide much in terms of gains overall on the chart.
The Bloomberg article mentioned a drop by US$10 if nothing is done. That would seem more technically feasible, and probably really shake up the oil volatility market if it comes true, although I am skeptical for much below a US$70 for WTI crude this week. Technically, there is still a pretty wide DMI gap, and great negative MACD trend, plus every single important line is on the down on a doji that looks like an evening star.
Bulls will have their work cut out for them whether there is a decision supporting them or not, but bears will probably be able to maul whatever they want on a decision in their favour. Now, with that, let’s look at what the other end of the equation, dollar strength might look like.
We’re right back up on the 1 200 level with some positive momentum courtesy of the DMI and MACD. it is interesting that both of these are showing positive move indication but really bad trend movements! The 63 EMA however might provide a lot of resistance, allowing a negative move to reject the last two weeks’ advance and reject the trend line again.
Looking at the long-term picture might help provide a lot of perspective in this analysis, especially after three weeks of gains that puts the price right up against the upper trend line. Silver is acting very similarly, to the point that reproducing a chart here isn’t worthwhile, although there is a resistance line a bit further up thanks to silver’s volatility. I still think it looks tough for gold to beat that negative trend line.
Another great indicator of dollar strength however has already (from fundamental reasons) shown itself to bounce off its resistance lines downwards.
There isn’t too much to say here, other than that Thursday’s trading looks very much the same as for the gold price on Friday, and that the fall since July is on a comparable level to crude after adjusting for volatility.
The technical storm winds blew a little bit harder on the euro, and Draghi promised to stamp out deflation fears, but the similarities are still uncanny to me. Balancing on a knife’s edge like this with massive momentum pointing off the cliff doesn’t look inspiring for the euro, but given US dollar strength as a positive for global equity markets, this might be very positive for stock market across the world.