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What to Expect From Crude Oil in the Face of Eurozone Fears


A look at the current weakness in Brent crude, and a heads-up as to where it could go in the coming weeks.

The results of the Italian elections have sent the markets into a veritable tizzy. What had been a simple story of the "Draghi Put" underscoring the floor at $1.20 on the euro last summer has quickly turned into a sequel to last year's Greek Tragedy. The complete repudiation of the EU's hand-chosen – and unelected – Prime Minister, Mario Monti, has brought the specter of a breakup of the eurozone back to the headlines. I'm not sure that anything that drastic will occur, but it may create an opportunity for Italy to drive a better bargain with the so-called Troika The European Union, The International Monetary Fund, and the European Central Bank – when it comes to any potential bailout. If that occurs it will spell wider trouble for Germany and the ECB with Spain.

The market that had been holding up well along with US equities had been Brent crude. It fell alongside the euro (NYSEARCA:FXE) and gold (NYSEARCA:GLD) as deflationary fears have gripped the market again. Between the lack of security in Europe and the sequester hitting the US budget with $85 billion in politically-motivated and arbitrary cuts, crude oil could no longer levitate solely on the promise of aggressive monetary stimulus by the Federal Reserve. That, however, now looks to have rolled over, having rejected the $120-per-barrel level.

While all of these markets along with the US dollar are all extremely important and inextricably linked, I'd like to focus on the current weakness in Brent crude, in the form of the US Brent Crude ETF (NYSEARCA:BNO), and give traders a heads-up as to where it could head in the coming weeks.

The first thing to note is that BNO rose for nine consecutive weeks, which is a very abnormal run. These two weeks have brought the price back within the five-month consolidation period from September to January. Since July 26, 2010 (N=133 weeks) the longest consecutive uptrend was six weeks long. From that perspective alone BNO was due for a change in direction. There have been, however, only three instances of downtrends lasting longer than two weeks. BNO has risen from $54.26 to a close on March 1 of $82.99 (52.9%). The correction has been swift and, given the history, above average in severity. From the same statistical set, the average move below the open for the week is -1.59 points and the difference between the weekly closes (noted as "Range" in table below) is 1.86 points.

For this week, a neutral open would create a 77.5% probability of violating last week's low and just a 12.5% chance of breaking through last week's high. So, we are looking at 6:1 odds of continued downside action. This also looks like it could be the beginning of a larger trending move.

Friday, March 1 was the weekday of a new month and the monthly chart shows that BNO violated February's low on Friday, setting up a low probability of breaking back above February's high of 88.71. BNO is very volatile month to month with a range of 3.86 points. Both inside bars (8.2%) and engulfing bars (3.9%) are very rare events. Inside bars are normally 15-20% regardless of time frame. The odds for March because of Friday are for continued weakness in BNO. There is the possibility of a two-bar reversal on the monthly chart. A close below the January low would be bearish. Such an event could signal that we are in for a Q2 that is similar to that of 2012's. With Friday's close there is a 70.4% chance that this could occur. It would take a similar two week reversal to negate the current bearish signal, which is, at this point, highly unlikely.

The techniques I used in this analysis are outlined in detail in my book, The BIG Trade: Simple Strategies for Maximum Market Returns.
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