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Retreating Crude To Put Shine Back On Gold


If oil stumbles, where will investors go?


Crude Oil (basis July) has been tracking a distributive template for the past two-three weeks. This was somewhat of a secret while prices continued probing higher highs. The first sell signal didn't trigger until closing under $130 Tuesday.

Today's rejection of the initially favorable inventory reaction tells me that the distribution isn't a secret anymore. It also tells me the rest of the template is probably also correct, that the resulting downleg will be steep and deep as the paradigm shifts quickly.

If my template does continue to track and crude oil dives precipitously in the near-term, the mainstream assumption is this will be good for S&P. Really? The same S&P that has now retraced half of the recent 70-point tumble? Perhaps tumbling oil prices will be "good" for stocks in only the same way that today's inventories report was "good" for oil prices - i.e. briefly. Somehow I doubt that equity analysts will be quick to raise earnings estimates based on potentially lower energy costs.

So where is all that oil money to go? Gold.

I should say upfront that I'm not calling for gold's bull market to resume. In fact, there's a gap down to the 862.00 area (basis August) that needs to be filled, along with a retest of the last downleg's 856.00 target. But the pattern did trigger a sell signal under $918 Monday, and the first downleg's target was fulfilled this morning under $879. The target has been probed deeply enough that a close back above $879 would trigger a buy signal - for a correction, but a buy signal nonetheless.

If crude oil is crashing, then managers and investors alike will be looking for a replacement inflation vehicle. And the sheer size of crude's rally/bubble suggests that many of its participants won't be interested in getting too exotic. Meanwhile, there's a shiny golden lump falling back to earth. It has some more falling to do, but there's room to squeeze in a bounce up to 905.00 first.
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