Future economic expectations are strong drivers of both Oil prices and the Stock Market. A slowing economy portends lower demand for Oil and reduced earnings for stocks. While Oil doesn’t always lead the stock market, they are highly correlated and if Oil breaks below multi-month support it will be a warning that stocks may do the same. The recent two day fall in Oil from $57 to 53 has added downside pressure to stocks this week and a drop below $50 will likely accelerate declines in equities back to their 8% correction lows under 2800 basis the SP 500 Index. The next target zone for Oil in 2019 under the $49 to $50 area is a major support zone between $40 and $46 a barrel. If the lower 40’s in Oil are reached, stocks will be down well over 10%. We would add that a breakout higher in Gold or Bond prices in a flight to safety also adds downside pressure to the stock market.
Technically the stock market trading range we have expected remains in force, with each test of support and resistance increasing the odds of a breakout. While the movements in Oil, Gold and Bonds have recently been a negative for stocks, we note there is a potential short term Bullish pattern if stock prices merely retest the SP 2940’s for a fourth time. Such a test would support a breakout back toward records highs near 3030. In the Bear camp we view the 2860’s SP target as an inflection support area, below which a test of the trading range lows near 2800 and likely a break much lower could occur in September.