Last week, our friend Steve Belmont made an interesting comment. “Since markets are human creations, they respond to human rhythms. Like all human emotions, fear and greed tend to reach a fever pitch and then, invariably, wane. One could say market corrections are basically physical manifestations of waning human emotions. Italian mathematician Leonardo Fibonacci figured out a way to measure the ebbs and flows in human emotions. This measurement is called a Fibonacci sequence or the “golden ratio.”
Steve, who trades commodities for a living, applied the golden ratio to the recent action in the oil markets. “Fibonacci discovered that corrections in trending markets tend to retrace 38.2%, 50% or 61.8% depending upon the strength of the trend. Markets with strong trends will retrace just 38% while markets with relatively weaker trends will retrace 50% or 61.8%. A retracement beyond 61.8% means that the trend has most likely ended and the market is entering a sideways mode.”
And here’s the bit about oil, written on Friday mind you. “This morning’s low in crude not only comes awfully close to a 38.2% retracement, it also corresponds with the 10-month uptrend line…Stocks may be melting down due to subprime woes, but that is not going to stop Americans from hopping into their SUVs nor stop violence in the Mideast. Consequently, we view this stock market-inspired correction in crude to be a near-term buying opportunity.”
Is he right? Hedge funds haven’t only been selling blue chips to raise cash recently. A lot of long commodities and resource bets in the futures markets are being closed, too. The reduction in financial speculation on rising commodity prices accounts for some of the price action in the futures markets. But in the real economy, as Steve points out, the real demand for oil is a lot more robust than the financial demand for oil.
Markets and Money