As long as there is this ridiculous linkage between the S&P 500 Index and the price of crude oil, Jim Cramer of Mad Money on CNBC is going to try to explain the relationship between the two. What better way to predict the direction of these two elements than to consult the charts?
Cramer and I discussed crude oil during last night’s Off the Charts segment. Though I agree that the recent action in oil has been absolutely hideous, I tried to calm some fears, explaining that the downward slide of black gold is not unprecedented – and it’s not the end of the world.
Essentially, I think crude oil could still go lower. When I consulted the daily chart of West Texas Crude, I could clearly see that oil is oversold. When oil is oversold at these levels, it will remain there for a long time. Though there was a bounce in oil on Wednesday, I pointed out that rallies tend to be aggressively sold soon thereafter. The question is, when will it stop?
“Trying to call a bottom in oil here is like catching a falling knife—you’ll just end up with blood all over the place,” Jim Cramer noted.
The good news is that even though oil will be ugly for a while, it doesn’t necessarily mean the stock market will be ugly, too. I believe that there is a good chance the market will go higher, even as oil keeps falling.
Back to that nice rally on Wednesday. Would the averages really have been up if oil hadn’t been up, too? Probably not. But have no fear, it is possible to break this linkage!
I pointed out during horrendous oil price declines in the past, the market has been able to break away from oil and reach new highs on days when oil was down. For example, in 1991, when oil was down more than 32 percent, the S&P rallied 30 percent. That is part of the reason I think this could be a great moment to buy.