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Asset Watch
Thursday, August 29, 2024
As investors weigh the potential impact of rate cuts on the U.S. economy, the bears note how historical easing cycles have occurred near recessions. While rate cuts have happened during expansionary cycles in the past, real-economy assets have performed quite well in the periods that followed.
Consequently, with crude oil caught in the crossfire of this debate, a major move could be on the horizon.
Despite the recent rally, crude oil has made lower highs in recent weeks, as risk-on and risk-off sentiment has largely favoured the bears. Crude is a highly volatile asset that can decline rapidly over short periods, so traders are often quick to exit their positions at the first sign of trouble.
The Conference Board revealed on August 27 that its U.S. Consumer Confidence Index rose to 103.3 in August and was revised upward to 101.9 in July. While the data was mixed across different age cohorts, it’s likely no coincidence that the confidence boost occurred alongside a meaningful decline in long-term interest rates.
With Treasury yields and the U.S. dollar dropping recently, both support economic growth, as a weaker greenback makes U.S. exports more attractive, and lower interest rates make financing more affordable. Add it all up, and increased consumption could be bullish for crude over the medium term.
The downward-sloping white line highlights how crude confronts resistance in the $77 area. Additionally, $80 has been a tough level to overcome, so turning both into support is necessary for a sustained uptrend.
To that point, the 50-hour moving average (the blue line) is a crucial variable. Crude fell below it on August 27, and after the last breakdown, it became material resistance in mid-August during a roughly $8 decline.
Given the data above, the short-term battle is between the 50-hour MA near $76 and declining resistance near $77. Caution is warranted when crude trades below the 50-hour MA, as a narrowing of support and resistance could produce a large move in either direction.
If the breakdown persists, more aggressive traders may want to consider a short position if the 50-hour MA becomes confirmed resistance.
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