Oil Market Update
October 5, 2007
After a fine run that took it to new highs, oil appears to be in the process of breaking down, at least on an intermediate basis. On the year-to-date chart for Light Crude we can see how it is starting to round over and back off beneath the return line of the uptrend that began last January. It is, of course, quite normal that it should turn lower having made a run at the upper return line of the uptrend channel that resulted in it reaching its normal overbought limits on its RSI and MACD indicators, however, it is noteworthy that it failed to attain the upper return line by a significant margin before the advance ran out of steam - this has bearish implications, and suggests that the uptrend from January may fail in due course, although it would be reasonable to expect a tradable bounce once the index makes contact with the lower channel line. On this chart we can make out the bullish Falling Wedge that preceded the strong rally from mid-August, and we can also see that the price has risen within the confines of a dome pattern from that time, which we will now examine in more detail on a shorter-term chart.
On the shorter-term chart for Light Crude, which goes back to mid-late July, we can see how, after completing a bullish Falling Wedge pattern in mid-August, the price has advanced within the constraints of a parabolic “Distribution Dome” that allowed for rapid gains in the earlier stages of the advance, which has gradually petered out as the increasing distribution as the price got higher and higher has progressively taken its toll. Eventually a tipping point is reached where profit takers overwhelm the hapless buyers and the advance exhausts itself and the price starts to reverse, which is the point we have now arrived at. If we look carefully, we can see that a Head-and-Shoulders top appears to be forming beneath the top of the dome, above a line of support at about $78.40 - $79 which could be labeled as the “neckline” of the pattern, and if the symmetry of this pattern continues then we may be presented with the perfect opportunity to short oil should it form a Right Shoulder to complement the Left Shoulder and complete the pattern. This may not happen - it could go straight into decline from here, but the chances are good that it will, so traders should watch out for this, and, of course, it would present any traders still long with a final opportunity to get out at a good price. Sometimes, dome patterns abort when a sudden wave of new buying breaks the price out upside from the dome. Therefore a clear break above the dome line would be a signal to reverse position and go long with close stops.
Oil stocks, being more speculative, tend to forecast moves in oil itself, and thus it is interesting and important to observe that oil stocks have already broken down, signaling that oil will soon go into a more serious retreat.
On the 3-year chart for the OIX oil index, we can see how, after their recent significant gains, oil stocks have stalled out and are just starting to break down beneath resistance approaching their July highs. Thus a Double Top may be completing and the chances are high that oil stocks will retreat back at least to the vicinity of their 200-day moving average now just above 700 on the index, and possibly further down to the uptrend channel line currently at about 660, at which point, even if the uptrend is doomed to fail, which a Double Top would suggest is going to happen, we should see a tradable bounce develop.
On the 6-month chart for the OIX oil index we can see recent action in more detail and observe how a steep downtrend into August was followed by an equally steep uptrend - note the fine Reversal Hammer on the 16th August, the day when most everything hit bottom. We can also clearly see how the index has failed to break above the resistance at the July high, and is now breaking down, having first made a sideways breakdown from its steep intermediate uptrend channel. Thus, a new intermediate downtrend has been signaled, and the appropriate stance for traders is to liquidate most oil stocks and possibly short them, only going long upon one of two conditions being met - either on a clear breakout above the July highs, with close stops, or, much more likely, a retreat back to either the 200-day moving average, or the lower trendline, depending on the conditions then prevailing, for, as already mentioned, the Double Top now approaching completion suggests an eventual breakdown from the uptrend in force from January.
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