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Crude Oil, Gold to Rebound Amid Broad Correction in QE2-Linked Assets

Crude Oil, Gold to Rebound Amid Broad Correction in QE2-Linked Assets

2011-05-09 09:39:00
Ilya Spivak, Sr. Currency Strategist
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Commodities – Energy

Oil to Bounce with Stocks After Last Week’s Selloff

WTI Crude Oil (NY Close): $97.18 // -2.62 // -2.63%

As we discussed last week, prices took out support at the midline of a rising channel that has guided them higher since February 2009, initially exposing the $93.00 figure followed by the channel bottom (now at $88.32) over the coming weeks. Shorter term, oversold relative strength studies hint a corrective bounce is likely, with initial resistance found at the 38.2% Fibonacci retracement of the 5/2-5/6 decline ($102.35). The March 6 low at $94.65 lines up as immediate support.

Risk sentiment remains in focus, with the WTI contract still moving broadly in tandem with the MSCI World Stock Index. This is likely to open the door for a near-term recovery as bargain-hunters step into the fray after last week’s selloff across the risky asset universe. Major trend changes come in fits and starts though, and a bounce from here seems quite healthy for the progression of the larger down trend that now looks increasingly likely to materialize as traders faced with the prospect of higher US yields after the expiry of QE2 in June unwind USD-funded positions on a range of assets including crude.

Crude_Oil_Gold_to_Rebound_Amid_Broad_Correction_in_QE2_Linked_Assets_body_Picture_3.png, Crude Oil, Gold to Rebound Amid Broad Correction in QE2-Linked Assets

Commodities – Metals

Gold to Mirror Recovery Across QE2-Linked Assets

Spot Gold (NY Close): $1495.60 // +21.30 // +1.44%

Gold has mounted a rebound from support at $1474.25, the 38.2% Fibonacci retracement of the rally from January’s swing low, a barrier reinforced by a rising trend line set from the same point. Initial resistance lines up at $1513.54, the 23.6% Fib, while renewed selling pressure through 38.2% level clears the way to challenge the 50% Fib at $1442.50.

As with oil, gold was a beneficiary of cheap US Dollar funding created by the Fed’s quantitative easing program. With QE2 due to expire in June, those bets began to unwind last week. However, as we discussed in detail in our weekly forecast for the yellow metal, the move lower will not develop in a straight line, with a corrective bounce likely in the cards over the near term before the bears reclaim momentum.

Crude_Oil_Gold_to_Rebound_Amid_Broad_Correction_in_QE2_Linked_Assets_body_Picture_4.png, Crude Oil, Gold to Rebound Amid Broad Correction in QE2-Linked Assets

Spot Silver (NY Close): $35.63 // +0.94 // +2.69%

Prices found interim support above the $33.00 figure, recovering to test resistance at the 23.6% Fibonacci retracement of the 4/25-5/6 decline at $37.01. A break above this barrier exposes the 38.2% Fib at $39.45, while renewed selling through current support clears the way to challenge $31.24.

As yet another QE2-linked asset, silver is likely to see a near-term upward correction along with gold and oil over the coming days before sellers return in force. The gold/silver remains near the highest levels in over three months, suggesting the cheaper metal will continue to underperform its more expensive counterpart.

Crude_Oil_Gold_to_Rebound_Amid_Broad_Correction_in_QE2_Linked_Assets_body_Picture_5.png, Crude Oil, Gold to Rebound Amid Broad Correction in QE2-Linked Assets

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