Oil Market Update
August 11th, 2009
The uptrend in oil arrived at the upper end of our target range in the low $70's given in the last Oil Market update posted on 6th June. After hitting our target a few days later in early to mid-June an intermediate top area completed which led to a plunge early in July that broke oil down from the uptrend in force from mid-February. This drop took oil down to a support level above its then falling 200-day moving average from which an impressive recovery rally developed. This rally has seen oil flirting with the underside of the failed uptrend, a typical occurrence after an uptrend failure, and it has even succeeded in ascending into the resistance approaching its June highs in recent days where it has been struggling and the chances are high that it will fail and go into reverse shortly. Thus, we have the perfect shorting point for oil here. Perfect because the risk/reward ratio is excellent - if it drops from here you make a lot of money, but if it breaks above the resistance you close out the position immediately it breaks above the June highs for a small loss. The macro factors suggesting that oil will go into reverse shortly include a probable downturn in the resource sector generally, a possible sizeable rally in the dollar, a reversal in the broad stockmarket and the rapidly worsening oil COT structure. An 8-month chart for Light Crude is used here as it shows the entire uptrend following the lows of last December and subsequent action in detail.
Oil stocks look very vulnerable indeed here. They have put in a miserable performance in recent months, given the magnitude of the rally in oil itself and in the broad stockmarket, having failed to break out of the large trading range shown on our 1-year chart for the OIX oil index. The minor uptrend in force from early July did not even make it to the top of the range before it failed, suggesting a heavy drop is in store if the broad stockmarket and oil turn lower soon as expected. Oil stocks generally should therefore be liquidated here, particularly the large "index slaves", and speculators may consider ways to capitalize on the anticipated drop, such as shorting or Put options.
August 11th, 2009
Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and lives in The Lake District, Chile.
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