Financial markets started the trading week in a risk-off move, mainly driven by the bearish price action seen in the crude oil price. The price of oil formed a head and shoulders pattern, just confirmed by the recent drop. Moreover, as the measured move was confirmed, the bearish reversal might just be the start of a new, bearish trend.
The COVID-19 pandemic led to financial markets’ correlations to increase considerably. Because all central banks acted the same way (i.e., lowered the interest rates to zero or below and engaged in unconventional monetary policies), the correlations tightened and one move in one market triggers similar reactions in other markets.
The price of oil recovered from its pandemic lows and rallied to $77. As long as the bullish trend existed, it created a risk-on environment, where equities are rising, and the US dollar declines. But the recent drop after the head and shoulders formation might be the start of something new. A bearish trend in the oil price would put further pressure on the US equity markets. On the other hand, it will lift the pressure on inflation, as it rose recently to levels not seen in many decades.
Crude Oil Technical Analysis
From a technical perspective, the price of oil eyes a key support area at $62. A move below $62 means that the bearish trend was strong enough to break below the previous higher low belonging to the bullish trend, suggesting further weakness ahead.
Bears may want to go short on the price of oil at market and have a stop just shy above $71-$72 area. On a move below $62, bears may want to add to the short side and move the stop for the entire position to $65. As for the target, a move below $58 might be in the cards should $62 give way.