Crude bottom is near

January 20, 2016 01:00 PM

The Cycle Projection Oscillator (CPO) is a technical tool that uses complex algorithms to filter multiple cycles from historical data, combines them and gives a graphical representation of their productive behavior. The CPO methodology employs proprietary statistical techniques to obtain cyclical information from price data. Other proprietary frequency domain techniques are then employed to obtain the cycles embedded in the price. 

In the CPO charts, the green line represents the detrended market price and the red line indicates the CPO projection (the bar chart above is the underlying market). The blue lines above and below the projection line represent a two-sigma move and indicate overbought and oversold territory.

Dow Jones Index

The CPO recently confirmed that the late August sell-off in equities was the extent of the 2015 correction and that the Dow Jones Index is heading higher. However, the CPO is not anticipating a major move. It seems unlikely the Dow will challenge all-time highs in a mild upswing it anticipates topping in the first quarter. The CPO is projecting another downward correction around February that could be more severe, which would take the index lower than the one in August. 

WTI crude oil

As WTI crude oil continued its slide below $40 per barrel in the second week of December, everyone is asking how low will crude go and when will it hit bottom. The answer, according to the CPO, is very soon. By Christmas, crude may have bottomed and begun a strong move higher. The CPO is showing crude will rally sharply in the first quarter of 2016, possibly testing the highs from last spring. However, this is not a one-way trip as the CPO is expecting the crude rally to reverse in the second quarter and return close to current levels. 

30-year treasury bond yield

With the Federal Reserve expected to tighten short-term interest rates for the first time in a decade in December, it is expected that yields on longer-term interest rates will rise as well. The CPO is showing a gradual upswing in the yield on the 30-year bond that wil push it back above 3%. However, this does not appear to be the end of the long-term bull market in Treasuries. The CPO is projecting that yields will top out in the first quarter and begin an even sharper move downwards that will send yields below where they are today.

About the Author

John Rawlins is a former member of the CBOT with more than 30 years of experience in trading and research. He co-developed the Cycle Projection Oscillator, which has been featured in Futures and numerous research reports, with an aerospace engineer to identify the dominant cycles in a data stream and project them into the future. Reach John at johnrawlins@msn.com. @cpopro1. You can reach John at johnrawlins@msn.com.