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Crude Oil May Bounce with S&P 500, Fading "Tail Risk" Threatens Gold

Crude Oil May Bounce with S&P 500, Fading "Tail Risk" Threatens Gold

2011-06-17 03:47:00
Ilya Spivak, Sr. Currency Strategist

Commodities – Energy

Crude Oil May Bounce, Quadruple Witching Clouds Outlook

WTI Crude Oil (NY Close): $94.95 // +0.14 // +0.15%

Prices put in a Doji candlestick above support at $94.52, pointing to indecision and hinting there is scope for a correction higher. S&P 500 stock index futures are pushing higher overnight, reinforcing case for an upside scenario over the near term as the spectrum of risky assets correct higher after a brutal week of aggressive selling. Near-term resistance lines up at $96.89.

The landscape is hardly without pitfalls however as Friday brings so-called “quadruple witching” – a day when contracts for stock index futures, stock index options, stock options and single stock futures all expire at the same time – which can bring plenty of knee-jerk volatility and makes firm forecasting of near-term price action an atypically tough proposition.

On the data front, the preliminary University of Michigan Consumer Confidence reading for June is expected to show sentiment soured for the first in three months, albeit slightly so. Even a superficially positive outcome may prove enough to push risky assets higher however – as appeared to be the case today – with traders seemingly looking for excuses to pare bearish exposure after the volatility already on the books for the week.

Crude_Oil_May_Bounce_with_SP_500_Fading_Tail_Risk_Threatens_Gold_body_Picture_3.png, Crude Oil May Bounce with S&P 500, Fading "Tail Risk" Threatens Gold

Commodities – Metals

Gold Chart Hits at Losses as “Tail Risk” Fades

Spot Gold (NY Close): 1529.80 // -1.07 // -0.07%

Prices put in a bearish Hanging Man candlestick following a retest of support-turned-resistance at a rising trend line established from late January, hinting sellers may be ready to retake the initiative. With that in mind, the signal is tenuous absent confirmation on a firm bearish on the current candle, so the larger downside implications of current positioning remain to be determined. Initial support lines up at $1509.49, with a break lower exposing downside targets at $1495.92 and $1482.35.

While prices have struggled to respond consistently to headline market themes over recent weeks, an interesting relationship is emerging between gold and the CBOE Skew Index, an options-based gauge measuring the probability of an exceptionally large drop in the S&P 500 (a so-called “black swan” event). The index reversed lower from a three-week high just a day before gold’s upswing was cut short at trend line resistance, hinting that while the metal is not necessarily responding to simple risk aversion (i.e. a decline of “normal” magnitude in the S&P, defined for Skew as anything less than 2 standard deviations), it seems to rise when panic sets in and investors begin fearing a catastrophic-level selloff.

Sizing up current market conditions, the probability of a black swan magnitude event (often called “tail risk” by investors) as implied by Skew has dropped off to about 8 percent from a peak above 9 percent earlier this week, but the index remains above its historic average. This means that while we are likely to see a pullback into the end of the week, prices are likely to remain relatively supported over the near term. Broadly speaking however, Skew has trended lower since late April, pointing to gradually mounting selling pressure and reinforcing the medium- to long-term bearish implications of the current technical setup.

Crude_Oil_May_Bounce_with_SP_500_Fading_Tail_Risk_Threatens_Gold_body_Picture_4.png, Crude Oil May Bounce with S&P 500, Fading "Tail Risk" Threatens Gold

Spot Silver (NY Close): $35.56 // -0.25 // -0.69%

Silver positioning is little changed from yesterday, with overall positioning broadly bearish since sellers pushed prices lower out of a triangle chart pattern four days go. As with gold however, getting a firm reading on near-term price action has been difficult and the correlation with the Skew Index discussed above doesn’t seem to bear out for silver as it has for its more expensive counterpart.

With that in mind, silver ETF holdings have dropped to the lowest level in over seven months, pointing to fading investment demand and reinforcing the bearish implications of current technical positioning. Near-term support remains at $34.78, with a break lower exposing $32.24. Immediate resistance stands at $36.34.

Crude_Oil_May_Bounce_with_SP_500_Fading_Tail_Risk_Threatens_Gold_body_Picture_5.png, Crude Oil May Bounce with S&P 500, Fading "Tail Risk" Threatens Gold

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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