Seriously? What does gold have to do with oil? See for yourself.
When we look at the charts, we see that crude oil has moved up and down many times, giving contradictory signals. Is there is anything that can give us more clues about the next bigger move? I found something like this and I shared it in yesterday’s Oil Trading Alert.
Today, I’m sharing my thoughts with you.
So, what is it about the charts that can give us clues about where oil will go in the coming days? The answer to this question can be found in the relationship between oil and… gold.
Seriously? What does gold have to do with oil?
It turns out that quite a lot if we look at the charts below. I invite you to analyze them with me - you will see for yourself.
Looking at the $WTIC: $GOLD ratio we state the correlation between it and the price of black gold is very high (0.98), which means that changes in the ratio could give us valuable clues about crude oil moves.
So, what can we predict from the above chart?
From today’s point of view, we see that the ratio increased to a fresh multi-week peak last week (please pay attention to this fact because we haven't seen such price action in the case of oil… yup, we will talk about the implications a little later) and reached a very strong resistance area created by the 50- and 200-week moving averages and the red gap formed in mid-Nov, which continues to serve the sales side of the market.
As you see, the proximity to it was strong enough to stop further improvement in the week that started on Jan.22, which translated into a sharp decline in the following week. At this point, it is worth noting that back then, the ratio opened the mentioned week with the pro-declining gap – just like it did yesterday, which shows that it is worth taking a closer look at this relationship.
So, let's check what trace the mentioned price action leaves behind on the daily chart.
From the short-term perspective, we see that although the ratio broke above the Jan. 29 peak, this improvement was very temporary and finally resulted in an invalidation of the earlier breakout and a bearish candlestick formation (about which I will write a little more under the next chart).
As I mentioned earlier, we didn’t see such price action in the case of crude oil.
What does it mean?
A negative divergence between the ratio and the price of black gold.
Has something similar happened in the past?
Yes!
What did it lead to?
See for yourself on the enlarged daily chart below.
Looking at the chart, we see that similar price action took place when the previous peak (Jan.29) was formed (I marked both cases with grey dashed horizontal lines and red dotted lines to make it easier to see the similarities between both situations).
Additionally, when we take a closer look, we see that we the similarities do not end there because both at the end of Jan. and now, the same pro-declining candlestick formations were formed – two bearish engulfing patterns!
On top of that, when we focus on negative divergences, we will notice them in another place - they are also visible on the indicators.
As you can see on the first bigger daily chart, last week’s fresh high in the ratio didn’t correspond to higher levels of daily indicators (in the case of RSI, CCI and the Stochastic Oscillator), which raises concerns about the continuation of the upward movement.
Why?
Because negative divergences have already appeared in the past between consecutive highs: Jul. 27, 2023 – Aug.9, 2023, Sep.6, 2023 – Sep.28, 2023, and now.
What happened in all the previous cases?
The formation of the second (higher) peak was preceded by a smaller or larger correction. Therefore, in my opinion, it seems very likely that history will repeat itself again and we will see a move to the downside in the coming days (in the ratio and also in crude oil).
This scenario is not only reinforced by all the above-mentioned technical factors (and similarities), but also by the red gap that started yesterday’s session (please note that there is one more divergence between the ratio and crude oil here, but this time positive – crude oil didn’t close the gap, which still serves as the support, which suggests that an attempt to move higher before the next (bigger) move to the downside can’t be ruled out) and the sell signals generated by the daily indicators.
At this point, it is worth noting that in all previous cases, a decline below the level of 100 (in CCI) after the second top translated into a bigger decline in the ratio (and crude oil). We can also see the same regularity in the case of the Stochastic Oscillator, which suggests that further deterioration may be just around the corner.
And what interesting conclusions can we draw from the analysis of this relationship when it comes to gold? That's a completely different story. Not for today But I will tell you a little secret… soon I will share with you my comments about gold (yup, that's right - not only about black gold about which you can read daily on oilpriceforecast.com).
If you’d like to know what is the current technical picture of copper, I encourage you to subscribe to Oil Trading Alerts. And if you’re not yet on our free mailing list, I strongly encourage you to join it - you’ll stay up to date with our free analyses that will still put you ahead of 99% of investors that don’t have access to this information. Join our free oil newsletter today.
Stay tuned and… see you tomorrow.
Anna Radomska