Why I think you should be watching crude oil (and the Dow) closely.

Can crude continue to strengthen? It’s definitely possible; however, if or when it does, it could be met with considerable selling pressure.

The “how” of it will likely be reliant on a weaker dollar and/or stronger equities. Let’s assume for now that sustained-stronger equities are not a reality for now. And let’s not forget that crude oil has only just recently established near-term support above 80.00. There is an intraday support area between 81.10 and 80.90 which shows just how important the 81.00 major psychological level is.

Let’s also consider the impact continued crude oil strength could have on some of the pairs…and at the same time I want to share with you thoughts on my Forex Market Pulse.

You can’t talk about crude without considering that crude oil is the KING of commodities. Yes, that includes gold. Think of it this way. Try to think about any aspect of your life that does not include crude oil in some way. If anything is grown or delivered, crude oil played a role. Now that does not mean I neglect commodities as a whole. Definitely not! I look at the U.S. Dollar Index continuously throughout the day. In fact I have an entire monitor that is dedicated to it.

Crude oil however is probably just as important to me as the Dow Jones Industrial Average is because is because I use it to measure risk. Higher commodities usually are reflective of a weaker dollar and risk appetite. A higher Dow Jones is also reflective of the same thing. By the way, I prefer the Dow to the S&P not because it’s a “better” index but because I think it’s more reflective of the broader psychology of the market, namely stocks. Ask anyone on the street where the S&P is and you’ll get a blank stare almost 10 out of 10 times. Ask that same person where the Dow is or at least whether it was up or down, they’ll know. That’s why I prefer to track the Dow.

Crude’s movement is well-known to be a significant factor on movement in the AUD/USD, USD/CAD, and NZD/USD. In fact the recent weakness in the aussie, loonie, and kiwi I think are largely attributed to the fall in crude from the July 26 high at 100.62 to the low from August 9 at 75.71. Nearly $25/barrel gone in eleven trading session – and it’s not just the amount of the sell-off, it’s the speed at which the bears drove it down. Oh yeah, and did I forget to mention, the Dow melted down over roughly the same period 2,136 points.

Part of trading multiple pairs is not only understanding how pairs interact but also how a stronger or weaker dollar, Dow, crude oil, gold, and commodities effect each individual currency. That also brings up a point I want to discuss at-length (soon) here which is HARMONY – harmony with the Forex Market Pulse and also when you are trading multiple pairs. Someone please remind me to make sure I write an update on this soon…

Crude’s rally today can be explained by not-so-much a weak dollar but rather the rally in the Dow (currently up over 400 points) and the solid Unemployment Claims number releases today which was when the pre-market Dow futures took a considerable turn and began to rally into a strong 9:30am open and hasn’t looked back.

Crude’s rally is potentially setting another 1.0000 showdown in the USD/CAD (which I will likely sell short aka “fade’). A rally in crude will also push the aussie and kiwi higher against the U.S. Dollar. The current stabilization in the AUD/USD and NZD/USD are not based on greenback weakness but rather risk appetite and a move higher in equities.

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  • Joshua Pearce Gibson

    Crude oil as a risk measure…. Never even thought of it that way… Although it makes perfect sense when you think about it.

    • Raghee Horner

      Crude oil yes, definitely. The king of commodities plays a role in almost everything! 

  • Alpha12th

    I agree that the crude oil is a king of commodity.

    When Dow is going down, I almost certainly crude oil will follow.

    However, when crude oil is down, is Dow follow?

  • Alpha12th

    So, we can concluded that the Dow is the most important factor.

    If Dow drop, Crude down, AUD/USD down, USD/CAD up, gold up.

    • Raghee Horner

      I think the goal is to discover which is driving market psychology. I will do a future video on this…

      But yes, generally speaking, stronger dollar usually means weaker Dow and vice versa.

      Stronger Dow means weaker dollar, strong commodities…USD/CAD down, AUD/USD, and NZD/USD up…EUR/USD up. risk appetite.