Oil Says: Big Drop Ahead!

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By Sean Brodrick

Most investors hope this market correction ends sooner rather than later. I hope that, too.

Now brace yourself for some bad news: Oil price action is telling us not to get our hopes up. Not at all.

You’ll remember on March 17, I posted a chart of the Dow Transports. That index was screaming a warning cry that all was not right with the market.

Then, on Tuesday, the Transports’ warning came true as the major indices went into "Sell! Sell! Sell" mode. Pretty much everything but utilities and gold miners fell out of bed. Hard.

You can see an updated chart of the Transports’ dire warning HERE. It still looks terrible. The bearish trend is getting stronger.

Now, the price of West Texas Intermediate Crude is chiming in. And many investors will wish the Texans kept their big yaps shut!

WTI crude is the American oil benchmark. It’s what markets use to track U.S. oil prices.

Thanks to some wheeling and dealing by the Saudis, OPEC and other foreign producers managed to put a lid on production and a floor under oil prices early last year. That agreement was reinforced at the end of 2016.

But U.S. shale oil producers aren’t part of that agreement. And recently, rising U.S. production caused oil prices to fall off a cliff.

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You’ll see I’ve indicated what may be a "bear flag" on the chart. We won’t know until it resolves. But there’s a saying on Wall Street: "Flags fly at half-mast." In other words, the downward move in oil may only be half-done.

Mind you, outside events can flip the whole picture for oil overnight. It’s a very volatile commodity.

So how does oil relate to the S&P 500? Well, it turns out that corrections in oil often proceed corrections in the broader market.

Take a gander …

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On top, I track the performance of oil. On the bottom is the performance of the S&P 500.

Sure enough, big moves up or down in oil are often followed by the big stock index. That’s not too surprising. Energy stocks are a big part of the S&P 500.

Now look how oil just broke its uptrend. Will the S&P 500 do the same? That would be a heck of a move. About 10% lower!

Sure, charts are an art — not a science. Just because a chart gives a warning doesn’t mean it must come true. If that were so, all chartists would be billionaires.

But there’s enough of a coinkydink that investors might want to pay heed to oil. And pray that crude finds its footing sooner rather than later.

Because otherwise oil is warning: "Look out below!"

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