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Oct 21, 2019 4:40 AM ET

Negative Factors Suggest Continued Downside in Commodities Prices

iCrowd Newswire - Oct 21, 2019

Stock markets found themselves in negative territory to start the week, as continued trade obstacles between the United States and China set the tone for new declines in equities benchmarks. The Dow Jones Industrial Average is looking vulnerable to a sustained break below important psychological levels at 26,600 after creating a double top trading condition on the daily charts.

This is negative market activity that has been largely replicated in each of the U.S. equity benchmarks, and it is reasonable to expect that the added uncertainty to begin to weigh more heavily on emerging market assets. In all of the confusion, investors seem to be neglecting the activity currently developing in the commodities markets.

Unfortunately, stock futures may continue to see downward moves as a result of weakened expectations for corporate earnings. But influences on supply and demand in the commodities space will likely become equally prominent and these negative market changes could send oil prices back toward their prior lows.

The 2019 rallies in crude oil have taken many traders by surprise, and the general expectation is that these gains are likely to continue well into the end of the year. Stocks with substantial exposure to crude oil prices have been hit particularly hard with Exxon Mobil trading at lower levels and several more blue-chip names seeing similar declines. However, this assertion has yet to be confirmed on the charts themselves and weakening growth prospects in several economic regions (i.e. China and the eurozone) could limit demand during these periods.

Recent geopolitical and financial market events have put pressure on energy markets and several other assets in the commodities space. At this stage, the clear line in the sand for crude oil prices is the support zone near $50 per barrel. Markets did experience a previous move above this support area, however, prices quickly reversed and this is starting to exhibit all the classic features of a false breakout.This negative outlook has been confirmed by the bearish MACD readings on the daily charts and a clear break below the 50-day EMA should accelerate losses.

Another economic factor which supports the bearish outlook for crude oil prices can be found in the dominant trends for the U.S. currency. With oil values priced in dollars, foreign exchange markets could continue to play a pivotal role in the underlying trend in crude oil markets. The most liquid currency pair in the world is the EUR/USD, and this is the instrument which is often viewed as the central indicator for coming valuation trends in the greenback.

EUR/USD is trading back below its 50-day and 200-day exponential moving averages, which is heavily indicative of future strength in the U.S. dollar. A clear downtrend has been in place for this pair since the 2008 financial crisis, and deteriorating growth prospects in the eurozone make it unlikely this trend will be reversing in 2019. The next level of historical support suggests further declines of at least 7%. The MACD histogram on the EUR/USD daily charts is now firmly negative, which adds to the forecast argument. As a result, a bullish outlook for the greenback may continue to pressure oil prices and the dominant trend trajectory suggests continuations of these expectations could persist in the weeks ahead.

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