Focus on what we do know (seasonal tendencies), not what we don't (Syria)

Most crude oil and gold traders are scouring Middle East headlines tabbing for clues of the next price move. However, the truth is we have no historical norm or pattern to help guide us through the Syrian crisis. Even if you are able to predict the decisions and actions of politicians, there is no telling how the markets will react. Accordingly, we feel like it is a good idea to step away from the Syrian crisis and look at the historic seasonal patterns of these commodity markets, along with basic technical analysis techniques, for guidance.

There are no guarantees that the normal price behavior will occur this year, but the odds of speculating on such are much higher than making decisions based on what does, or does not, happen in Syria. Consequently, traders should avoid any aggressive directional plays in the current environment. We favor the idea of looking for possible temporary aberrations in the price of crude oil and gold to initiate speculations in the direction of each market’s seasonal tendency. In either case, both of these commodity markets are notoriously volatile; they are not for the faint of heart.

Gold

Gold seasonals call for overall bullish trade through late September or early October. Yet, prices have come a long way since the June lows under $1,200 and chasing markets higher is almost always a recipe for disaster. As a result, we feel traders are best off approaching the market with a buy on LARGE dips attitude.

Market participants frequently buy on the rumor, sell on the fact. Should the U.S. opt for military action in Syria, gold prices might actually relax simply because most of the buying took place in anticipation of the attack; perhaps a "Syria sell-off" will provide the bulls with opportunities. On the contrary, if the U.S. refrains from military action, traders long the market might take that as an opportunity to take some profits off the table causing a further correction in price.

In our view, speculation on further European stimulus and potential inflation worries should keep investors interested in re-allocating assets into gold that were liquidated during the June gold panic. According to the COT Report released by the CFTC last week, large speculators are holding a mere 78,000 net long contracts; this signals that there is plenty of room for more buyers to move back into the long side of gold.

Momentum indicators such as RSI and Williams %R have fallen on a daily chart from overbought territory and are now signaling a probable continuation of back and filling price action. A dip to $1,350 in the December futures contract would peak my interest but in a perfect world, a knee-jerk decline to $1,270ish would be a level we could get comfortably bullish again.

Crude Oil

Crude oil seasonals contrast that of gold; oil has a strong tendency to top out in early to mid-September. In this market, we believe traders will be best off being bearish on LARGE rallies. Because Syria is not a large producer of crude oil, and a contagion of violence doesn't seem likely, we expect the emotional impact of any military strike to be short-lived.

In previous Middle East invasions by the U.S. large spikes in price were followed by even larger declines. For instance, in May 2011 when NATO went into action against Libyan leader Muammar Gaddafi, US oil prices actually fell almost 10 percent. Similarly, 10 years ago, when the US-led coalition invaded Iraq and oil futures tumbled 15 percent. In this particular case, the EIA has ensured that the crude oil market remains well supplied and prepared to withstand reasonable supply disruptions.

From a charting standpoint, crude oil is currently consolidating in a violent but relatively narrow trading range. Predicting the initial breakout carries odds similar to a coin toss. However, we suspect that once the dust settles the overall trend will be bearish. Ideally, the bears would love to see a sharp “Syrian strike spike” into the $115/$116 on short covering and stop running triggered by the break of last week’s high price near $112.20. If seen, the $115/116 level would likely act as fierce resistance and pose attractive opportunities for bearish traders. If crude oil doesn’t find another short-lived bid on Syrian headlines, a break beneath $100 could lead to watershed selling toward $90 per barrel with intermediate support near $96. After all, large speculators are holding a near record 345,000 net short position, which will eventually need to be liquidated.

Momentum indicators support the idea of an imminent reversal in price action. The Slow Stochastics are hovering at elevated levels suggesting the path of least resistance will eventually be lower once Middle East fear premium dissipates. Specifically, %K and the %D lines that compromise the Slow Stochastics oscillator are trading near 80 and are beginning to cross over; once the lines dip below 80 technical momentum typically turns bearish. Similarly, the Moving Average Convergence Divergence, commonly known as the MACD, is beginning to wane. If the MACD line and the MACD Average line cross to point downward, the overall trend is believed to have turn bearish.