Oil Market Update
October 19, 2007
Oil and oil stocks have confounded the expectations of a correction in the last update and have continued to perform strongly, although it was made clear in a different article that if oil broke above its Distribution Dome it would return to bullish mode. We can see this dome on the year to date chart for Light Crude and the sharp advance that has followed a breakout above the confines of the dome. We can also see that it is now approaching the upper return line of a trend channel in force since last January and becoming very overbought on its short-term oscillators in the process. It is therefore considered likely that a reaction will set in soon, and this may occur after a ?throwover breakout? above the top channel line.
With the money supply now being inflated aggressively worldwide, and especially in the US, the outlook generally is for continued and possibly accelerating inflation, which is expected to continue to fuel a broad-based bull market in commodities. Thus it is reasonable to expect oil, which is priced in US dollars. to continue to advance and the long-term chart shown here reveals that it could easily go much, much higher. It does not have any overhead resistance to contend with, and if it advanced to meet the upper channel line shown, which is admittedly provisional, it would clearly result in further huge gains.
Just a few weeks ago there was the danger that oil stocks would form a Double Top with their July highs, particularly as they had advanced to reach these highs in an overbought state, but over the past week they have broken out to new highs. However, although they have also broken out above the top return line of the channel shown on the 3-year OIX oil index chart, they have not thus far done so by a wide margin, and are therefore vulnerable to a reaction, especially as short-term oscillators are once again approaching their normal overbought limits. Nevertheless, any such reaction is not thought likely to be deep, as it would appear that prices are now being shepherded higher by a steeper channel shown on the long-term chart that goes back to the start of this oil stock bull market early in 2003, with this channel now taking over from the one shown on the 3-year chart. It is interesting to observe that the August reaction stopped just a little above the lower line of this steeper channel, and there is quite clearly plenty of upside potential remaining as the index has still only risen halfway across the channel on this latest advance.
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