McClellan Chart in Focus: Oil’s Drop Bigger Than Called For, But Right On Schedule – By Tom McClellan


Chart In Focus

Crude oil prices reached a new multi-year high on October 3, and then started a dramatic drop.  It has just now fallen for 12 straight trading days to reach the lowest close since December 2017.  There are various theories about why this has happened, attributing it to comments from President Trump, OPEC chicanery, Iranian oil exports, falling demand, fracking overproduction, and all manner of other explanations.  But few of those explanations address the “when” question, concerning why this is happening now.

Thankfully, gold gives us an answer to that “when” question.  But it is a decidedly imperfect answer.  It gives us flawed answers about the magnitude of the moves, but excellent answers about their timing.

This week’s chart shows us how the movements in gold prices tend to get echoed about 20 months later in the movements of crude oil prices.  It reveals that the crude oil price drop over the past 3 weeks is really the echo of a similar drop in gold prices 20 months ago.  The difference is in the magnitude.

Gold’s equivalent price drop 20 months ago was tiny in comparison to the 27% drawdown in crude oil futures prices.  But the timing was right.  So what gives with this disparity?  Why should oil prices drop so hard now as the echo of a tiny drop in gold prices?

Focusing on that question can lead one to miss what had happened before, leading up to this big drop.  Gold’s message said that oil prices were supposed to have topped in March 2018, but instead oil continued to make higher highs all the way into October 2018. The timing of the up and down movements was still right, but the continued move higher into October 2018 was not what gold said was on the script.

And then suddenly, oil realized what it was supposed to be doing, and worked extra hard to get back on track.  “Oh, I’m supposed to be over there,” oil prices said.  So is it really an alarming development to see the 12-day 27% decline?  Or was oil wrong for being too high in the first place?

That is the right frame of reference to put this question into.  One can easily argue that gold was “wrong” for not foretelling the magnitude of oil’s recent price decline.  But the other side of that argument is that oil was “wrong” for being too high for too long, and thus having to drop really far to make up for that mistake and get itself back on track.

Trying to point fingers at the higher high in oil prices being wrong or the drastic plunge being wrong can lead one to miss the point, which is that gold has told us when the dance steps should happen.  And this drop is happening right on schedule.  Next should be a corresponding rebound in oil prices, to match gold’s rebound 20 months ago.

Tom McClellan
Editor, The McClellan Market Report

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.