Clive Maund
gold, silver, & oil shares
Oil Market Update
originally published July 4th, 2010Oil is believed to be in the last stages of a large top area with a breakdown expected soon that should lead to a severe decline. On the 3-year chart for Light Crude we can see that a complex Head-and-Shoulders top has developed this year after what is viewed as a bearmarket rally, that followed the 2008 crash. The topping out process started as far back as June of last year, so it can be seen that after 4 months of strong gains last year, the price has gone almost nowhere for the past 13 months. The long, leisurely topping out process has allowed the 200-day moving average to catch up with the price and flatten out, and last week we saw a bearish crossover of the 50-day and 200-day moving averages for the first time since the Fall of 2008, so the stage is set for a severe decline - hardly surprising when you factor in the look of the broad stockmarket charts.
While it is of limited use technically, the 6-month chart for Light Crude does show recent action in much more detail. On this chart we can see how the steep drop in May resulted in an extremely oversold condition as made clear by the RSI and MACD indicators, calling for a bounce to complete a Right Shoulder, which was called on the site in the article The Looming Financial Holocaust on 30th May, see chart from which below the 3-year chart above. With the bounce having occurred on schedule the price is now dropping away steeply and menacingly towards the critical support at the neckline of the H&S top - once this support fails oil should plunge.
We have largely avoided oil stocks like the plague for the past several months, and when you look at the 3-year chart for the OIX oil stocks index, it is easy to see why. This is a truly awful looking chart with prices in ragged retreat as a large Broadening Top completes, that has been developing since October of last year. Actually, this index broke down last week from this top area, despite the fact that oil has yet to break down, and despite the fact that the bottom support line of the Broadening Top is steep, so that heavy losses have already been inflicted. Oil stocks have been terribly weak relative to oil itself, which is due in part of course to the BP fiasco in the Gulf, so that they are already quite deeply oversold. However, bulls drawing comfort from this and diving in now thinking that they are buying at bargain prices are likely to be in for a nasty shock. For while a minor rally could occur here over the next week or two to alleviate the oversold condition, the ground is likely to open up beneath oil stocks once oil breaks down from its Head-and-Shoulders top area, especially if the broad market caves in at the same time, which is what we are expecting. If this scenario unfolds the OIX oil stock index can be expected to plunge rapidly to the support shown on the chart at the 2008 - 2009 lows as a MINIMUM DOWNSIDE OBJECTIVE, and it is thought very likely that it will crash this support and plunge to lower levels still.
The short-term 6-month chart for the OIX index certainly suggests a near-term rebound, for as we can see the steep drop during the second half of June has resulted in a quite deeply oversold condition, with the RSI indicator nudging critically oversold, calling for a bounce, and a large gap has opened up with the moving averages. In addition we can see that a couple of doji candlesticks have appeared over the past 2 trading days, which suggest short-term downside exhaustion. However the larger picture shown on the 3-year chart and the 3-year chart for oil and the broad stockmarket indices reminds us that the longer-term outlook is grim. Therefore any near-term rally may be shorted in the reasonable expectation of renewed weakness. Before closing we should mention a factor that could turn an otherwise weak rally into a potential spike, which would be a sudden attack on Iran by Israel. While there are a lot of rumbling noises this scenario is assigned a low probability over the short to medium-term.
We have a good history of calling major turning points in the oil market, and those who listened could have made themselves, or saved themselves, fortunes. The following chart was posted on the site just before the brutal collapse of 2008 began…
…and last year’s substantial bear market rally in oil was called just before it began.
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The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities.
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