Clive Maund
gold, silver, & oil shares
Oil Market Update
originally published January 31st, 2010Crude has fallen substantially over the past month but has still not broken down from its gentle uptrend in force from last June. That, however, does not mean that it won't soon do so.
The 3-year chart for West Texas Light Crude shows the extraordinarily severe crash in the oil price in the second half of 2008, which, as it got wildly overdone, was followed by a strong recovery rally from last February through into June, since which time the price has made much more modest progress as it has continued to ascend in the gentle uptrend shown. All of the action from early last year is viewed as a bearmarket rally, with the gradual ascent from last June regarded as a topping out process as the price has been slowly stalling out beneath a wall of overhanging supply associated with the giant top area that we consider to have started with the congestion zone that ran roughly from October 2007 through February 2008. The gentle uptrend from June exhibits some convergence, which is bearish, and the fact that the early January high did not make the top line of this channel suggests that the topping out process is completing, with the gradual convergence of the price and its moving averages, which are rolling over, indicating that the risk of a breakdown into a downtrend is steadily increasing, which fits with the deterioration already well underway in other commodities and the broad stockmarket.
On the 1-year chart for Light Crude we can see the deteriorating alignment of the moving averages in more detail. While the bunching of the price and moving averages is increasing the likelihood of a change of trend, the 50-day moving average turning down highlights the growing danger, especially as the the 200-day moving average is starting to flatten out. That said, however, the rather steep drop of the past month has resulted in a substantially oversold condition at a point where there is strong support at the lower channel line and just above the rising 200-day moving average, a situation which is expected to lead to a bounce to alleviate the oversold condition before the expected breakdown occurs. How far might it bounce and over what timeframe? Taking into account the parallel deterioration elsewhere, probably no higher than the $76 - $77.50 area within a week or two.
While oil itself began a topping out process as far back as last June, oil stocks continued to make good progress up until October due to the broad stockmarket defying the expectations of many and plodding higher. However, as it started to run out of puff late in the year, oil stocks entered a slightly broadening (bearish) trading range, which it is now evident is a probable top area. The duration of this trading range has allowed the 200-day moving average to draw up close to the index, so that the index and its moving averages are now bunching as is the case with oil itself - a typical precondition for a change of trend. Even though this trading range is believed to be a top area that presages breakdown and a bearmarket that is likely to be severe, this index is now quite deeply oversold after its sharp decline this month, and as it has dropped back to a zone of substantial support at the bottom of the range and just above its rising 200-day moving average, it is very likely to bounce soon to alleviate its oversold condition, before it turns lower again and breaks down to enter the bearmarket phase. How far might it rally short-term given the gathering storm clouds? - probably no higher than the middle of the trading range, i.e. about 685 - 690, and probably over the next week or two, in tandem with a minor relief rally in crude.
The latest COT chart for oil is interesting. Up until the latest figures it looked horribly bearish, with the Large Specs continuing to pile on the long positions even as the price of crude dropped, and the Commercials very heavily short. While overall this chart is VERY BEARISH, the sharp drop in Large Spec long positions last week suggests that they have suddenly taken fright and started to bail. Since they are usually wrong this supports our notion that a relief rally is likely over the next week or two. The ideal situation for us will be if we get the relief rally and the Large Specs build up their long positions again - this will be our signal to short this sector heavily.
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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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Although a qualified and experienced stockmarket analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr Maund’s opinions on the market and stocks can only be construed as a solicitation to buy and sell securities when they are subject to the prior approval and endorsement of a Registered Securities Advisor operating in accordance with the appropriate regulations in your area of jurisdiction.