Crude Oil Bottom Likely To Propel Dow Industrials Higher

The chart below clearly illustrates that a relationship exists between crude oil and the Dow Index. For most of the 1st half of 2015, oil traded sideways as the Dow followed suit. Then around July of 2015, oil broke down, while the Dow followed in its footsteps. We see a similar pattern from Nov-Dec 2015; Oil headed lower as the Dow once again followed in its footsteps. Hence, it suggests oil prices will drive the markets.

Fast forward to Jan-Feb 2016 to notice that the Dow Index followed crude oil to a “T”. The only difference being that while crude oil dropped to a new Low in Feb, the Dow put in a higher low. After trading above $51.00, oil consolidated -- and many a naysayer would have you believe that the oil rally is over. They will soon be proven wrong once again, but that is a story for another day. Given the strong run up, the pull back that oil experienced was minor in nature, as crude oil put in a bottom. From low to high, crude oil tacked on almost 100% gains.

We were expecting it to pull back to the $40 area with a possible overshoot to the $39 ranges. To be noted it traded as low as $39.19 before reversing course. As far as we are concerned, the oil correction is over. Moreover, it is getting ready to trend higher. Additionally, it appears the Dow is once again following in crude oil’s footsteps as illustrated in the above chart. In this instance, the Dow bottomed earlier than oil. After dropping down to the 18300 region, the Dow reversed course and soared to new highs. Potentially it could still test the 17800 area. Former resistance turned into support, before attempting to trade past 19000.

Conclusion

The consolidation in oil appears to be over. Subsequent to their relationship, the Dow together with Crude oil could be gearing up to trade to new highs. Ideally (but it is not necessary), the Dow would test the 17800-18000 ranges before making a break for 19000. Thus all sharp pullbacks should be viewed as buying opportunities.