Investors are happy because oil prices are coming down.  When oil prices drop, smaller investors have been gaining confidence and buying stocks.  When oil prices rise, smaller investors have been fearful and selling stocks. 

This morning, we will look at oil price trends, the China connection and explore what is happening.

Let's discuss oil first.  Many analyst are now saying that oil is going to go down to $80 to $100 per barrel.  That is a long term expectation and many things can happen between now and then.

Currently, on the short term, oil is showing signs that pressure is growing for the upside rather than the downside as you can see on the chart below.

Note the arrows I have drawn on the chart's MACD-C and Relative Strength indicators.  The current pattern is VERY similar to the past  two patterns when oil finished a bottoming process and moved higher.  This is suggesting that oil prices will move higher fairly soon.  See the next comment ...

An interesting oil/China phenomenon is in play. Now that the Olympics are about to begin, China's smog/pollution problem is all over the news.

What many don't know, is the extent of the problem and what China has done in the past few months.

1.  The Chinese air pollution problem is one of the worst in the entire world.  How bad?  Here is an report excerpt of an interview by the Los Angeles Times with Su Aimin in Taiyuan, China:   "Su Aimin spat on the ground, and admired the result. 'You see, it's white,' said the 33-year-old production manager at Taiyuan Iron & Steel, pointing to his saliva. 'Before, it was black. I'm not kidding'".   While this is an repugnant description of the extremely bad air conditions in Chinese factories, it is a reality.

2.  Taiyuan is an industrial city that is 250 miles away from Beijing ... that is how far its extremely bad pollution levels are traveling. (Taiyuan has been flagged as one of the most polluted cities in the entire world.)  For the past few months, China has cut back, suspended, or closed many factories just to clean up the air for the Olympics.

3. At the same time, oil prices have dropped during the past few months.  The Olympics start tomorrow, and they end on August 24th.  That's 15 trading days away from today.  What happens when everyone leaves and China restarts their factories?  Will the surge in demand for oil, to restart these factories, create another sharp rise in oil prices?  Personally, I don't know how much oil we are talking about here, but I do know that China has spent over $16 billion just to reduce the air pollution for the Olympic games. Many Chinese citizens have been out of work while these factories have been closed, and need to go back to work soon.

*** The oil chart we posted above is suggesting that a bottom is settling in and RSI divergences are showing that there is pressure for an upside move in oil prices building. 

What's the point of all these comments?  The point is that China has lessened their demand for oil in the past few months, and the old demand level will be re-established soon.  As that day is approaching, oil prices are showing a positive divergence for an upside move fairly soon. 

Historically, when oil prices rise, people get scared ... inflation fears rise, and smaller investors start selling their stocks.  This is a condition worth monitoring due to the higher risk implications for investors.

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