Oil Market Update
November 19, 2008
With its latest drop last week oil has finally arrived at the upper end of our target zone in the low to mid $50's. This means that it has lost an astounding 62% in just 4 months - it is the sort of loss more usually associated with poor quality stocks rather than the "lifeblood of the modern world", which is what oil is. The reasons for it are now common knowledge - forced liquidation by leveraged speculators and the fear of an impending recession/depression. Just as the pendulum swung too far on the upside it has now swung too far on the downside, especially as politicians and world leaders have made it abundantly clear by their actions in recent weeks that they are going to inflate, and already are in grandiose fashion in order to save their hides, at least temporarily, from the consequences of a deflationary implosion.
On the 3-year chart for Light Crude we can see that the price is now arriving at the downside target projected from the Head-and-Shoulders top pattern, above which there is significant support arising from the early 2007 low. The precipitous decline from the highs has resulted in an extremely oversold condition which even given the worst case scenario of a plunge into a deflationary abyss would be expected to lead to some sort of recovery rally shortly, so given the unbridled inflation scenario which is being shamelessly pursued it is reasonable to expect a reversal and sizeable uptrend to develop soon, especially if the dollar spike burns itself out. The MACD indicator has recovered somewhat from its extraordinary oversold extreme at the end of last month, but only because the price has been dropping at a reduced rate. Meanwhile the now gigantic gap with the 200-day moving average, which exceeds that at the other extreme last July by a considerable margin, clearly creates the potential for a sizeable rally.
On the 6-month chart we can see that while the downtrend from the highs definitely isn't over, there are several indications that a reversal is likely soon. The MACD indicator is still at a deeply oversold level, and even though the price has continued lower over the past week or so, the MACD has actually been climbing showing that downside momentum is waning, a situation that could lead to a sudden reversal, especially given the huge gap with the 200-day moving average.
An important catalyst for a reversal in oil would be the dollar topping out, so it is worthwhile to take a look at the dollar, especially as its action late last week suggests that it may be about to do just that. On the 6-month chart for the dollar index we can see how it broke out upside from the Pennant as expected, but instead of quickly following through and advancing towards our target towards 92.5 it instead ran into trouble at last month's highs. It must now quickly break higher to avert the risk of it topping out here. Those who have been fleeing into T-bills via the dollar and have been a major force driving this dollar spike are soon going to find themselves feeling like stowaways aboard the Titanic. Like one of those plays where you know the ending we know the dollar is doomed, and so we ghoulishly watch as the forced liquidation runs it course, aware that the inescapable fundamentals of a bankrupt country trying to print its way out of trouble Zimbabwe style must reassert themselves - and when they do the dollar will plummet. Watch out for a break below the apex of the Pennant by the dollar, because if this happens things could get really ugly really fast.
November 19, 2008
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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