With respect to divining the outlook for oil you may recall that back last Monday we uncovered what looks like like a very potent positive setup for the Precious Metals sector. If the Precious Metals sector is to rally, then it means that the dollar and interest rates are likely to drop - and they have already started to as predicted a few weeks ago - and that in turn implies that the upward pressure on oil prices is likely to ease perhaps due to some unforeseen diplomatic developments.
Now we will look at the 1-year chart for Light Crude on which we can immediately see that the unresolved state of affairs fundamentally is reflected by the technical setup of this chart, for we can see that it is very close to arriving at the apex or point of a large Symmetrical Triangle, and therefore it must break out of it one way or the other soon. Some of you may recall that we called the bottom in oil early in July and have been on the right side of this ever since, and we clearly don’t want to give our gains back to Mr Market in the event of oil breaking down soon as is possible. Notice how Light Crude has been trending higher since early July in the parallel uptrend channel shown. However, it has been and is being constrained by the downsloping trendline from the March – April highs which is the upper boundary of a large Symmetrical Triangle. This important trendline put a lid on the rally in September and it is currently doing the same with the rally this month and it is noteworthy that the current rally looks feeble compared to the September one with momentum (MACD) being weak. So this is a situation that is likely to generate a big move one way or the other soon. We saw on Monday the positive looking setup for the Precious Metals which implies that the dollar and rates are likely to drop and also means that oil is likely to drop too.
Meanwhile, although Brent Crude has been pushing new highs in recent days, it is at the upper boundary of a potential bearish Rising Wedge in force from early July that is strongly converging and therefore could lead to a sudden steep drop – if the price doesn’t soon “open out” this Wedge by pushing out of the top of it and driving higher, then we could see a reversal into a big drop. You may recall that I had earlier surmised that because the oil funds, BNO and USO, had broken out to new highs, that oil was destined to follow and do likewise, but, especially on the USO chart, bearish Wedge characteristics can also be observed on the charts of these funds.
We bought the oil sector at a very good entry point early in July…
Alright, so what’s the best way to handle this situation? If the Democrats do well on Tuesday, then oil will probably drop and possibly hard, given the setup. However, if Netanyhu and Trump decide to get in an attack on Iran before the election - and military assets are already positioned for this - then oil could spike higher as a result and the weekend is always the most probable time for such endeavours as this reduces the effect on markets. The chance of an attack over the weekend may not be that great but it is a very real possibility. A good tactic is therefore thought to be to exit many oil sector investments on Monday, if there is no attack over the weekend, with a view to redeploying the proceeds into the Precious Metals sector. But, bearing in mind that there are other analysts and investors around who think like me, you might find yourself selling into a falling market on Monday. This does look like a situation where “a bird in the hand is worth two in the bush” so it is considered prudent to lighten up on the sector today and tomorrow. One effective tactic is thought to be to sell half of any holdings in the sector today and tomorrow, taking advantage of the current good prices, and then wait to see what happens. If you do this, then if there is an attack over the weekend you are still in, and if there isn’t you will have front run the crowd who, thinking like me, will perhaps be heading for the exits on Monday and therefore driving prices lower.
End of update.
Posted at 8.25 am EDT on 29th October 26.