Major Moves 

Crude oil prices went on a wild ride today as both supply and demand concerns roiled the commodity market.

Let's start with the supply concerns. Even though the members of the Organization of Petroleum Exporting Countries (OPEC) have lost some clout in the crude oil market now that the United States is producing so much crude of its own through its wildly successful fracking efforts, Saudi Arabia is still the 800-pound gorilla everyone pays attention to.

This weekend, Saudi Arabia announced that two of its oil tankers had been damaged in sabotage attacks near the Strait of Hormuz – a key choke point with Iran as ships come out of the Persian Gulf. The attacks didn't lead to any environmental emergencies, but they did send shock waves through the global crude oil market as traders started to worry that oil supply out of Saudi Arabia could be disrupted as trade disputes between the United States and Iran escalate.

When supply is constricted or is forecast to potentially be constricted, the price of crude oil tends to move higher. That is exactly what we saw in early trading this morning. Crude oil shot up dramatically in two spurts in the run-up to the opening bell for the stock market on Wall Street. However, the rapid price increases were just the opening salvo in today's crude oil volatility. As soon as the stock market opened, crude oil prices started to retreat.

To understand why, we now need to look at demand concerns. It took a few days for China to retaliate to the Trump administration's tariff increases, but retaliate it did. China increased tariffs on $60 billion of U.S. goods to 25%, beginning June 1, to match the new U.S. tariff rates. As the trade war between the United States and China intensifies, traders are concerned that the global economy is going to slow down. A slowdown in the global economy would not only hamper corporate revenue growth but also drive down demand for crude oil.

Demand for crude oil tends to increase when the economy is expanding because more people tend to have jobs they have to drive to; more people tend to have money to spend on new cars, airline travel and goods that need to be shipped around the world and across the country; and more consumers, businesses and governments tend to spend more on construction – which increases the use of fossil-fuel-powered shipping and construction equipment.

The opposite happens when the economy starts to slow down, or contract. Demand for crude oil tends to decrease. When demand declines, or is forecast to potentially decline, the price of crude oil tends to move lower. That is exactly what we saw after the opening bell. Crude oil lost ground for most of the day as traders worried that demand could be affected by the escalating trade war.

At the moment, it appears as though demand concerns are outweighing supply concerns in the crude oil market, but that could all change if tensions escalate between the United States and Iran or if the United States and China mutually decide to deescalate their trade negotiations.

Performance of light crude oil futures

S&P 500

The S&P 500 disappointed traders today by breaking below support at 2,816.94. This level had served as resistance while the index consolidated in late 2018 and again in late February and early March of this year. I had been watching this level wondering if it would hold as support, but there wasn't enough bullish resolve.

Unlike the last two trading days of last week, the bulls did not come storming back into the market in the final hours to push the index back up off of its lows. Instead, the S&P 500 closed down 2.41% at 2,811.87, just a few points above its intra-day low of 2,801.43.

As with any bearish move that challenges support, I will be looking to see if Tuesday generates a follow-through day or a rebound. All is not lost. It's too early to believe Henny Penny's rantings that "the sky is falling." Let's see how the rest of the week shapes up.

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Performance of the S&P 500 Index

Risk Indicators – Gold

In a confirmation of just how nervous traders on Wall Street are in the wake of the Trump administration's tariff increase and China's retaliatory response, the price of gold shot back above $1,300 per ounce today. This move is significant not only because it is the biggest one-day bullish move in gold since Feb. 19 but also because it invalidates the head and shoulders bearish reversal pattern the precious metal completed on April 16.

Assets complete head and shoulders patterns when they break below the price level that serves as the neckline of the pattern. Conversely, assets invalidate head and shoulders patterns when they break back above that same price level.

Gold initially broke below the uptrending price level that served as its neckline at $1,290 a few weeks ago. This established a price target of ~$1,223 for gold to drop to, based on the height of the tallest part of the head and shoulders pattern. Today, gold broke back above the same uptrending price level at $1,294 to invalidate the bearish trading signal and price target.

Gold is viewed as a safe-haven asset – an asset that outperforms during periods of economic or market uncertainty. As the trade war rhetoric between the United States and China intensifies, look for a growing number of traders to buy gold as they look to diversify their portfolios to adjust for increasing risk.

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Performance of gold futures

Bottom Line - Reality Sinks In

Heading into the weekend, most traders were hopeful that he Trump administration's tariff increase would be a catalyst to bring the United States and China closer to a trade agreement. Those hopes were dashed when China announced its retaliatory strike.

While past and current economic and earnings numbers still look strong, traders are starting to worry that the trade war could negatively affect future economic and earnings numbers. If these fears remain unchecked, we could see the S&P 500 back below 2,700 before the month is out.

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