Some Projections for Oil/USO and Stocks/S&P 500

Click on Chart to Enlarge

I wanted to follow up on a few recent posts to give readers some more historical background on what is taking place right now and what it likely means for the future.

First off, in a recent post I had suggested that oil prices may have made an intermediate term bottom (lasting at least several weeks). Based off the price action since that post, I am going to slightly backpedal on that. Because of the amount of the recent 40%+ advance that has been given back, it indicates oil prices will not make a strong further rally. However, from a market logic standpoint, it still appears that the recent lows completed an important downward phase in this bear market. The slight change in my outlook is that I now expect more of a sideways to slightly downward trading range/channel (rather than a vertical type advance) which may go below the recent lows on occasion over the next several weeks.

In the chart above (which is the USO ETF, not crude oil prices) I have drawn a box that would indicate the expectation for prices based on comparable historical commodity bear markets. Also, I drew some lines on the chart indicating the approximate price formation that I would expect to form over the next few weeks. The target box indicates that prices may go higher, though so far I would say that I expect prices to peak in the low end of that range if they make it at all.

The next topic I wanted to follow up on is the most recent post indicating that stocks are likely in another leg down. I also mentioned that I sense that the "investment community" thinks that the worst is over...... especially since the S&P 500 has made an apparent double bottom with the 2002 lows. However, the best historical comparisons to the current market environment, in terms of the size and duration of the price moves so far in this bear market, indicate an approximate 40% decline in approximately 4 months from the highs of this rally at 945ish (assuming that the rally has topped). That would put the S&P in the mid to high 500's. The historical range would be approximately 33% to about 50% in less than 6 months.

So despite what we as investors or traders think will happen or want to happen, these numbers are what history tells us is likely to happen....if we are willing to study and learn from history.

On a different note, based on short-term price behavior and the historical tendency for extreme moves on Friday and Monday to be reversed into the middle of the week, I would aniticipate an opportunity to initiate the next recommended trade (SDS, QID, DXD, BGZ, index put options, etc) by Thursday.

Pete