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Oil Market update

by Clive Maund
July 15th, 2006

Yesterday was a rather odd day in the oil and oil share market, for while oil broke higher, oil stocks did not, and were obviously held in restraint by the plunge in the general equity markets. If we look again at the charts in the Strategy article of the 11th, we can see that this behaviour was not so odd, because oil stocks had risen to become very overbought, as shown clearly by the MACD indicator, while oil itself was nowhere near as overbought. Thus it can be said that oil stocks anticipated the upside break by crude, and, due to the inhibiting effect of the big drop in the broad market, did not join in the party, although that is not to say that they won’t soon.

The break higher by oil yesterday from a near 3-month trading range signals the probable start of another run, and oil itself, at least, is therefore a buy. The situation is rather more complicated for oil stocks as they could end up in a “tug of war”, caught between the positive influence of rising oil prices and the negative influence of a falling general stockmarket, although on-balance, perhaps after some further unwinding of the current overbought condition, they are expected to advance in response to the rising oil price.

We will be looking at some option strategies to capitalize on this situation later today and tomorrow, including straddles. The latest military adventure by Israel is, of course, something of a wild card, and the consequences of it may have an important impact on oil prices, although the Arab world cannot in general do more than grumble about it, because to do anything more would put them on a collision course with the Israel ’s ally and benefactor, the United States. Ariel Sharon’s wry aside in the Knesset several years back said it all - “Don’t worry, we control America”.

Clive Maund

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern in Copiapo, Chile.

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No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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