Crude Oil Reverses Prior Losses on Fed Speculation

Crude Oil ( WTI ) - $82.00 // $0.23 // 0.28%

Commentary: A stunning reversal had crude oil and equity markets recouping a significant portion of Wednesday's losses. Oil ended Thursday's session $2.28, or 2.87%, higher to settle at $81.77. The catalyst was speculation pertaining to the Fed's anticipated monetary easing at the next meeting in November. Some market commentators are calling for the Fed to purchase $100 billion in Treasuries per month. Such an enormous level of quantitative easing would be seen as bullish for risk assets as it would create a much more stimulative economic environment, in addition to fanning fears of future inflation down the line.

Nevertheless, all speculation on what the Fed will do is just that-speculation. The larger uptrend in crude oil and equities began back in August, well before there were any hints that the U.S. central bank would take any meaningful action. Rather, traders have been encouraged by economic data that while choppy, has been less-worse than feared. Recent earnings reports from corporate America have been encouraging as well, with profits holding up in large part thanks to growth outside the U.S.

Overshadowed by the broader risk trends was the U.S. petroleum inventory report . The report was fairly neutral, but the bullish trend of a declining surplus was arrested largely due to an uptick in imports and depressed levels of U.S. demand. In fact, we saw that over the last four weeks, U.S. petroleum demand has been down a notable 0.5% year-over-year, the first such decline since the beginning of this year.

We continue to be constructive on crude oil, but would not be buyers until lower levels, near the low to mid-$70's. The ample supply picture should keep prices from running away, while robust global growth keeps prices supported.

Technical Outlook: Prices found support at $79.21 - the 38.2% Fibonacci retracement of the 8/25-10/07 rally - to re-enter the congestion range that had confined them since the beginning of the month. Near-term resistance lines up in the $82.97-$84.43 region. A reversal back through the 38.2% level sees initial support at $77.60, the 50% Fib.

Commodities - Metals

Gold Rises on Risk Reversal

Gold - $1342.25 // $4.00 // 0.30%

Commentary: Gold maintained its role as the anti-dollar on Wednesday, rising $14.20, or 1.07%, on a day in which the greenback declined 1.3% as measured by the trade-weighted Dollar Index. The one-month rolling correlation between the USD and gold thus remained strong at -0.96.

But correlations aside, gold is looking frothy regardless of what the dollar does from here. We have seen periods in which gold and the dollar have had a strong negative correlation as they have now, as well as periods when they have had a strong positive correlation, such as in August. The point being, the dollar does not have to turn meaningfully higher form here in order for gold to fall meaningfully lower from here.

That being said, the trend is higher in gold until prices put in a convincing string of declines. One big down day followed by an up day indicates nothing more than normal fluctuation within an uptrend.

Technical Outlook: Prices have staged a shallow recovery from support at $1332.99, the 23.6% Fibonacci retracement of the 7/28-10/14 advance, with continued upward momentum eyeing the $1355.65 level. Above that, resistance lines up at the top of a broken rising channel that had been in place since late September, now at $1370.68.

Silver - $23.73 // $0.23 // 0.94%

Commentary: Silver moved in step with gold, rising $0.59, or 2.5%, as the metal regained a portion of the prior day's nearly 4% decline. Prices are back down in overnight trade, however, and we will look to see whether the metal can now sustain lower prices.

In the longer-term, the interest of investors in silver, and the consequent rise in silver ETF holdings, should be supportive of prices. Speaking of long-term fundamentals, a Bloomberg report suggested that China may cut its silver exports by 40%. The culprit, according to the report, is increasing domestic demand in anticipation of inflation, as well as the 2008 cancellation of an export rebate. We shall see.

The gold/silver ratio now stands at 56.4, near the lowest level since August 2008. (The ratio measures the relative performance of gold and silver. A higher number indicates gold outperformance, while a lower number indicates silver outperformance).

Technical Outlook: Prices are recovering from horizontal support at $23.43 to re-test the $24.00 figure. A breakout higher exposes the next layer of resistance at $24.33. Alternatively, renewed selling will aim for the intersection of a falling channel set from this month's swing high and a rising trend line established from late August near the $23.00 level.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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