As experienced traders, it is imperative that we maintain a heightened sensitivity to frequently reported news. We must also possess a deep understanding of the chain reactions that this news may trigger and the ultimate outcomes it might lead to. Traders should be adept at predicting potential events in advance, identifying events with a higher probability of occurring, and then selecting appropriate trading strategies based on their judgment to ultimately profit from these trades.

In the case study below, we will examine the "recent increase in oil prices" to illustrate how to handle and analyze news or events. This information serves as a crucial foundation for comprehending market trends and ascertaining whether there are any trading opportunities to exploit within it.

Source: Reuters

On September 5th, when Saudi Arabia and Russia announced an extension of production cuts until the end of the year, oil prices surged. In fact, as early as May and July of this year, Saudi Arabia had repeatedly reduced production, ensuring that oil prices would not decline significantly. Although during this period, the United States and other Western-allied countries requested OPEC+ to increase production to ensure lower energy costs and stimulate the global economy, OPEC+ claimed that they were taking proactive measures to maintain market stability.

Source: VC Plus

Now, let's take a look at the trend of oil prices over the past year. Since OPEC+ announced production cuts, oil prices have been on the rise and have successfully established a support level of approximately $66.2 USD. Especially after the recent announcement of an extension of production cuts, oil prices have come close to $90 USD, seemingly attempting to break through this resistance level. Today, some analysts even predict that oil prices may rise above $100 USD.

Now, we must approach the analysis from the perspective of oil prices and start examining the trends. The increase in oil prices, of course, has the most significant impact on inflation. As is well known, the Federal Reserve has been committed to combating high inflation since last year. Therefore, the rise in oil prices is naturally unfavorable for inflation in the United States and may affect the results of the Federal Reserve's efforts to combat inflation over the past two years. In the recently announced August inflation data, there seem to be signs of a resurgence in inflation. Therefore, during a FOMC press conference, Jerome Powell also displayed unusually hawkish remarks, stating that as long as inflation hasn't reached the target of 2%, the Federal Reserve may consider raising interest rates.

Now, with this information in mind, let's consider the chain of events: rising oil prices will lead to inflation, and in turn, inflation will prompt the Federal Reserve to continue raising interest rates. So, what happens after the interest rate hikes?

If the United States continues to raise interest rates, it will drive the appreciation of the U.S. dollar. This is because when interest rates rise, U.S. bank deposits become more attractive compared to those in other countries (due to higher interest returns). This will lead people worldwide to have a greater willingness to exchange their currencies for U.S. dollars and deposit them in U.S. bank accounts to earn higher interest rates. The appreciation of the U.S. dollar, in turn, will result in a decline in the U.S. stock market. This happens for two primary reasons:

1. For individuals looking to buy stocks, they must exchange their domestic currency for the appreciating U.S. dollar, effectively reducing the purchasing power of foreign investors in U.S. stocks. Consequently, investor willingness and ability to purchase U.S. stocks decrease.
2. The increase in risk-free interest rates caused by interest rate hikes makes investors less willing to take on higher-risk investments. When an investor can achieve a 5.5% return in a risk-free fixed deposit, they are less inclined to engage in high-risk investments.

As a result, the ultimate outcome is a decline in the stock market. Of course, factors contributing to the stock market's decline include not only the appreciation of the U.S. dollar but also the drop in future profits for publicly traded companies due to inflation, which is expected to prompt investors to exit prematurely. This will be one of the reasons for the decline in U.S. stocks.

So, we rely solely on certain information sources (news, the U.S. CPI report, and the Federal Reserve press conferences) to deduce how the increase in oil prices eventually leads to the decline in the U.S. stock market. Within these deductions, we also identify several tradable assets, namely crude oil, the U.S. dollar index, and U.S. stock market indices. Therefore, once you learn how to deduce the unfolding of events, you can identify high-probability trading opportunities from them. Certainly, traders must also possess a fundamental understanding of economics and finance.

Conclusion

In conclusion, let's simplify the entire deduction process:

Rise in crude oil prices > Global inflation increases > If U.S. inflation rebounds, they will take extreme measures to suppress it > U.S. continues to raise interest rates to curb inflation > U.S. dollar appreciates > U.S. stocks decline due to (1) U.S. dollar appreciation increasing conversion costs, reducing the willingness of foreign investors to invest, (2) the increase in risk-free interest rates caused by interest rate hikes makes investors less willing to take on higher-risk investments, and (3) inflation increases, leading to a decline in investors' expectations of future profits and a decrease in investment willingness.

Indeed, the main focus of this article is the deduction process. The deduction shown above is a very limited prediction, but if you grasp the logic of this deduction, you can extend it to predict a broader range of impacts, thereby increasing the probability of accurate forecasts and, consequently, the success rate of trades.

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Disclaimer: This information does not represent a BUY or SELL recommendation on the stock covered. Traders and Investors are encouraged to do their own analysis on stocks instead of blindly following any Trading calls raised by various parties on the Internet.