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The Inform: Oil May Break Inventory Market's Spine as Crude Oil 'Goes Parabolic' – How To Put together

Oil futures are trading at a seven-year high, adding to jitters around a volatile stock market, and investors should be prepared for the possibility of another move higher, a chart watcher warned on Wednesday.

“Oil could be what breaks the backbone of the market as it gets parabolic around here. Be careful, but also make sure you are exposed to oil in case it does happen,” technical analyst Andrew Adams wrote in a note for Saut Strategy.

West Texas Intermediate Crude, the US benchmark, broke price resistance levels that Adams said he previously expected would cause him some trouble.

“If resistance is completely ignored there is usually a good chance for an asset to rise, but now there is a stronger resistance area around $85 where it stalled late last year before falling more than $20,” said Adams. “Up there I don't see much resistance at all until closer to $95 and at that point we could see a real fear of oil prices weighing on consumers who are already grappling with higher prices everywhere.

"Higher oil prices should continue to help oil companies, but they're also increasing costs in many other industries and could further hurt margins," he wrote.

WTI surged well above the $85 level in Wednesday's session. February contract CL.1 CLG22 for the front month rose 1.8% to close at $86.96. on the New York Mercantile Exchange, the highest close since October 8, 2014.

See: Oil builds on its highest price in more than 7 years as supply concerns linger

March Brent Crude Oil
BRN00,
-0.34%

BRNH22,
-0.34%,
the global benchmark closed at $88.44 a barrel, up 1.1%, at ICE Futures Europe, for the highest settlement since October 13, 2014. WTI is up nearly 16% so far in the new year, while Brent increased by 13.7%.

Meanwhile, stocks have tumbled into the new year as Treasury yields have soared, a move largely driven by expectations that the Federal Reserve will hike interest rates much more aggressively than previously expected this year and monetary policy otherwise will tighten.

In a chart: Stock Market Warning Sign: Here's what rising bond yields say about S&P 500 returns over the next 6 months

Treasury yields stabilized on Wednesday but stocks remained under pressure with the tech-heavy Nasdaq Composite
comp,
-1.15%
Entering the correction zone, defined as a 10% decline from a recent high. The Nasdaq is down 8.3% since the turn of the year, while the Dow Jones Industrial Average is down
djia,
-0.96%
is down 3.6% and the S&P 500
SPX,
-0.97%
fell by 2.8%.

Read: The Nasdaq Composite just posted its 66th correction since 1971 – this is what history says next for the stock market

However, energy remains a bright spot in stocks, with the sector up more than 16% so far in the new year and one of just two of the 11 sectors on the S&P 500 in positive territory, alongside financials (up 0.4%).

Oil stocks follow crude and are poised to either break out and continue the rally or pause, Adams said. The SPDR S&P Oil & Gas Exploration & Production Exchange Traded Fund
XOP,
-1.10%
is up 12.6% month to date but down 1.1% on Wednesday.

XOP has had a great start to the year and its Big Picture chart is positive. But it's trading at its upper volatility band and near where it met resistance a few months ago — a "critical point," he said (see chart below).

Saut strategy

"It's hard for me to suggest a big bet on oil stocks and oil stocks in general at such an uncertain time, but I continue to believe pullbacks in this group are buys and oil stocks continue to be the best source of alpha in this market." are. ' Adams wrote.

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