Crude Oil Set to Follow Stocks Lower, Gold Setup Hints Losses Ahead

Crude oil is vulnerable as S&P 500 stock index futures point to risk aversion into the close of the trading week while gold appears to have formed an important top.

Talking Points

• Crude Oil Vulnerable as S&P 500 Futures Point to Risk Aversion
• Gold Technical Setup Hints Significant in Place Below $1900/oz

WTI Crude Oil (NY Close): $89.40 // +0.49 // +0.55%

While the correlation between the S&P 500 and crude oil prices has come off a bit, the relationship remains significant enough to suspect that the decline in stock index futures ahead of the trading open in North America bodes ill for the WTI contract as well as shares. Needless to say, the University of Michigan gauge of US consumer confidence headlines the economic calendar, with expectations call for sentiment to rebound in September having hit the lowest level since November 2008 in the previous month. Importantly, it remains to be seen whether such an outcome will be treated as risk-positive in terms of its implications for economic growth or risk-negative in that it chips away at the probability of another bold set of stimulus being unveiled at next week's FOMC interest rate decision.

Technical positioning closely mirrors that of the S&P 500, with prices testing the top of a Flag chart formation reinforced by the upper boundary of a rising channel set from early May, a setup hinting at bearish continuation. The formation of a Bearish Engulfing candlestick pattern as well as the appearance of negative RSI divergence reinforces the case for a downside scenario. Initial support lines up at $83.12, the 23.6% Fibonacci extension level.

Spot Gold (NY Close): 1788.57 // -31.05 // -1.71%

Gold continues to show a strong inverse correlation with the S&P 500, with sharp losses on futures tracking the benchmark equity index ahead of the opening bell on Wall Street hinting a rebound may be ahead after yesterday's sharp selloff. A bounce in US consumer confidence may contain gains however, weighing against expectations that the Federal Reserve will unveil another aggressive round of stimulus next week and thereby negate demand for the yellow metal as an inflation hedge.

Naturally, a disappointing reading is likely to have the opposite effect, although the technical picture seems to suggest that markets are finally taking notice of the uneven but nonetheless significant improvement in leading US economic data since early June. Indeed, the double top setup we have been monitoring over recent days appears to have been validated with prices issuing a daily close below the chart formation's neckline support. A move toward a measured downside target at $1627.25 over the coming days is implied from here.

Spot Silver (NY Close): $39.85 // -0.86 // -2.10%

As with gold, a significant inverse correlation with the S&P 500 hints the bearish cues given in index futures ahead of the open across US exchanges suggests silver may rebound in the final hours of the trading week. However, as with its more expensive counterpart, a larger bearish milestone appears to have been overcome. Indeed, prices validated the Head and Shoulders top developing below the $44.00 figure we have been monitoring, implying a move lower to an implied target of $34.37 is ahead.

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