Oil Market Update
August 4, 2007
In the last update posted on 10th July oil and oil shares were expected to react soon due to the increasingly bearish crude oil COT structure, but oil has instead continued to edge higher within its uptrend, quickly coming within a whisker of our target at $80, which was deduced from the Head-and-Shoulders bottom shown on the 1-year chart. Oil stocks on the other hand have behaved as predicted and tanked. While this unusual divergence can clearly be explained to a considerable degree by the severe decline in the broad market impacting on oil stocks, there is also thought to be a strong element of oil stocks anticipating a reversal in crude, which the latest COT charts suggest is highly likely soon.
On the 1-year chart for Light Crude we can see how oil has continued to advance within its intermediate uptrend, and has come very close to achieving its Head-and-Shoulders target at $80, and although not quite there it is thought to be far too risky for traders to wait for the last $1 - $1.50, on account of the now very bearish COT chart for crude.
On the oil COT chart we can see how the Large Spec long positions and Commercial short positions have now opened out to reach extremes not seen for a long time. This is viewed as decidedly bearish and a strong sell signal. Although the long-term outlook for oil remains very bullish for widely publicized reasons, an intermediate reversal is thought to be close at hand that is likely to result in a substantial reaction.
On the 2-year OIX oil index chart we can clearly see that oil stocks are getting deeply oversold after their plunge of the past couple of weeks. Despite this it is thought unwise to think about re-entering them just yet. There are now 2 factors in play that are likely to kick the ball much further downhill in coming weeks. One of is the potential for the broad stockmarket to plunge steeply again, as described in the article Marketwatch - will the broad stockmarket plunge again - and oil stocks follow the broad market much more closely than Precious Metals stocks, which is why we have been leery of them in recent weeks. The other factor is the impact of a breakdown by oil from its intermediate uptrend, which as described above is believed to be imminent. The time to start considering going long again will be when the index drops into the zone between its 200-day moving average and lower channel line shown on the chart, depending on how the broad market battlefield looks at that time.
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