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Oil Market Update

Clive Maund
support@clivemaund.com
September 20th, 2011

We have scarcely looked at oil in recent months, as, apart from 2 short-lived tradable plunges, it has been very difficult to make money in this market - gold has been far more interesting. Yet this is remiss because oil is clearly of massive economic and political significance, immensely greater than gold, so it is always worth keeping an eye on what it is doing.

On its 7-month chart we can see that Light Crude went into reverse and began a downtrend that kicked off with a plunge early in May. This plunge synchronized with a sharp drop in commodities generally, especially silver which you may recall took a particularly severe beating. The downtrend continues and shows no signs of abating. To date there have been 3 significant downlegs within this downtrend, that have been followed by first a Trianglular consolidation, then a bearish Falling Wedge in July, and then another Falling Wedge which is right now completing - implying that another downleg is just about to start. Signs that the latest Wedge is complete are the fact that it has brought the price up to a zone of resistance that arises from earlier trading, which is just below its falling 50-day moving average and also close to the major downtrend channel line, with the countertrend movement of the price as it has advanced within the Wedge serving to largely neutralize the deeply oversold condition that resulted from the early August plunge. The continuing downtrend of the past several months has also resulted in a bearish cross of the moving averages, and while the 200-day moving average is still rising, which could theoretically result in a reversal, the formation of a bearish Wedge in recent weeks points to another downleg, as already mentioned that should turn the 200-day m.a. down.

The 5-year chart for Light Crude shows all of the upside action from the early 2009 lows to have been a large bearmarket rally, which if deflation now rears its ugly head, considered to be likely for reasons set out in the latest Gold Market update, has run its course, and it actually peaked back in April. This chart is also useful as it reveals a zone of strong support centered on $70, which is likely the first main downside objective of the current downtrend. Should this support eventually fail, oil can be expected to head a lot lower.

Even though oil fell hard early in May, oil stocks, as represented by the OIX oil stock index, fell back only moderately, which is due to the broad market suffering only a modest decline at that time. However, when both oil and the broad stockmarket tanked early in August, oil stocks took a savage beating. This tells us that the fortunes of oil stocks are largely dependant on the fortunes of the broad stockmarket, so if the latter caves in it is going to take oil stocks with it - hardly surprising as an economy in recession uses less oil and thus oil prices drop. Thus with the oil price looking like it is going to break down and drop again soon, and the broad stockmarket looking like it is going to do likewise, the current pattern forming in the OIX oil index, shown on the 6-month chart below, looks like a bearish Pennant consolidation within an ongoing downtrend, rather than a base pattern. If this interpretation is correct then we are at a good point to short oil majors, or buy Puts in them, after last week's rally.

Oil stocks look like they are at a good point to rally on the 5-year chart for the OIX oil index, as they have dropped back to a zone of strong support where they appear to have stabilized above the lower support line of the large potential uptrend channel shown. However, other indications, such as the bearish Wedge completing in oil itself that we looked at above, and the recent failure of the uptrend in the CRB commodities index, suggest that it will break down below this uptrend channel support line and head lower before much longer.

Clive Maund
September 20th, 2011
support@clivemaund.com

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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