The rally in Crude off the June low looks an awful lot like a head-and-shoulders top with a left shoulder on July 19, the head on September 14, and a right shoulder on October 10. Being as conservative as possible and drawing the neckline horizontally (rather than an upward sloping neckline that would pass under the low of October 3) we can see the pattern was triggered on October 23.
A possible reversal, which took place while exchanges were closed last week for the hurricane, was negated with Friday’s 2.6% plunge setting a new low in the September 14 decline. Measuring from the head to the neckline calls for a minimum move to 73.
Think that sounds a bit ‘extreme’? Take a longer view. It doesn’t take much imagination to see an even bigger head-and-shoulders top having developed since the bounce off the 2009 low. Now, with two breaches of the neckline, this pattern implies a minimum move to… 48! It’s time to ask ourselves what crude is telling us in terms of the broad ‘risk-trade’ in general and the equity markets in particular.
