Over the past few weeks, we have seen the price of crude oil pull back from its recent high of $42 per barrel. Last week, the price of crude oil pulled back to a technical support zone and then posted a strong gain, closing the weekly chart at the high.
Based on short-term technical indicators, along with the current momentum which crude oil has, we will likely see the recent highs of $42 a barrel tested once again.
So what does this mean for energy stocks and the stock market as a whole? If things unfold this week as expected, then we should see oil rise along with energy stocks and the S&P 500 index.
This weekly chart of oil shows what you can expect will happen over the next one-to-three weeks: a bounce in price.
Energy stocks of had a strong rally since the lows earlier this year. But, as you can see from the charts and basic technical analysis, the price is now running into resistance at the moving average.
The moving average has acted as resistance for price, and price is currently struggling at that level once again. Don't be surprised though to see the XLE fund push higher one last time testing the recent highs from last month before it tops and starting another large correction.
The U.S. Stock market
While the U.S. stock market has posted strong gains since the January low, this rally is going to come to an abrupt stop this month or in May.
If oil and energy stocks continue to move higher, we should see the stock market follow suit and for the S&P 500 to rally one last time up into a resistance zone before the next big wave of sellers step back into the market.
Energy and Stock Market Conclusion:
In short, the U.S. large-cap stocks are setting up for an epic drop in price. Technical analysis and cycle analysis are lining up very similar to what we saw during the 2000-2001 and 2007-2008 market tops. Investors should expect a 35%-to-50% market correction over the next 12-plus months.
With that said, the next few weeks will become very difficult to trade simply because the market is starting to get choppy with wild intraday price swings. This is because the average market participants are becoming more bullish than ever on stocks again while the large institutions are starting to distribute huge amounts of shares to these undereducated investors who don't know technical analysis and stock market cycles.
My current mindset has been to go into the markets for as little as 48 hours and then exit with a nice handsome profit using a strategy known as Price Spikes. This has worked out very well this year capturing very quick profits from these special "price spikes." It's a simple "Get-In & Get-Out" strategy for highly volatile markets.
Good times are coming for us active traders and investors, so buckle up.
This article is commentary by an independent contributor.
Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter.