Oil Market Update
June 26th, 2012
Thursday 21st June was a big day for oil, as it finally broke down from a massive 3-year long Head-and-Shoulders top area. On the 5-year chart for Light Crude we can see this big Head-and-Shoulders top and how yesterday's plunge to the $78 area resulted in a breakdown. This development has MAJOR BEARISH IMPLICATIONS
, particularly as it synchronized with a reversal in the broad stockmarket and an upside breakout by the dollar, which looks like it is starting another major upleg. Deflation and depression are back on the front burner, and that is seriously bad news for oil prices. Oil prices look set to crash along with the stockmarket, as in 2008, the main difference being that this time it could be worse.
It is common after a breakdown from a Head-and-Shoulders top for prices to mark time for a while, often creeping back to the breakdown point at underside of the pattern, before the decline such a breakdown portends gets underway in earnest. If this happen in coming days it will throw up a great shorting opportunity, with a close stop just above the neckline of the pattern. There are 2 support levels on the way down - one in the mid-$70's in the vicinity of the lows in the middle of last year, now not far below the current price, and another in the mid to high $60's, neither of which will provide much relief in the event of a crash situation developing.
The 6-month chart for Light Crude reveals that the decline from the start of May has been quite brutal - and this was even before the breakdown from the Head-and-Shoulders top that occurred just yesterday. This high momentum decline portends further heavy losses going forward. The critically oversold situation that had developed by the start of June led to a bear Flag developing, which served to unwind the oversold condition ahead of the next downleg which started Wednesday, leading to yesterday's breakdown.
As far as oil stocks are concerned our 5-year chart for the XOI oil index reveals that the entire rally from the 2008 - 2009 crash lows may be fairly described as a giant (in time terms) bearmarket rally. This long-term trend showed signs of running out of steam when the upwave early this year failed to get above last year's highs, and instead backed off from the red long-term downtrend line shown. As we can see the index is now threatening to break down at last from the uptrend in force from early 2009, and given what we have just observed on the charts for crude itself, this is what we can expect to see happen before much longer. If it does break down and the market crashes, oil stocks can be expected to plummet. Although it looks like a giant Triangle has been delineated on this chart, the pattern is not considered to be a true Triangle, it is just that the red trendline shown served to finish off the advance earlier this year, and is thus clearly a valid trendline.
The 6-month chart for the XOI index shows that oil stocks rose up to a perfect shorting point early this week, as the sad little bearish Rising Wedge took the index up precisely to an important trendline target at its falling 50-day moving average. Yesterday it broke down from the Wedge in a really decisive manner with a big drop that portends much lower prices to come. Today the sector is staging a modest rally, which it is entitled to given the magnitude of yesterday's drop - and this modest rally is viewed as providing a good opportunity to establish positions to take advantage of the expected severe decline going forward.
Someone should advise the Peak Oil camp warning of $200 oil that oil is subject to the forces of supply and demand like any other commodity, and that economic depressions are known to reduce demand for oil. They may get their $200 later on, but only in a situation of hyperinflation. It should also be brought to their attention that the United States is sat on a Natural Gas bonanza, and that this ever inventive country is going to find ways to capitalize on it, that could involve the wholesale conversion of automobiles to run on it.
June 26th, 2012
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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