Oil Market Update
October 1st, 2014
Oil has declined as expected and predicted in the last update, posted early in August, but has not broken down from the large formation that it has been stuck in since early 2011. Now it is showing signs that it is about to turn up and rally over the short to medium-term, although over a longer time horizon it could be severely impacted by a market crash triggered by rising interest rates.
Perhaps the most surprising thing to many is that oil has been so weak in the recent past despite the mess and mayhem in the Mid-East, which you would ordinarily expect to drive its price higher. The reason for this is of course the glut, aggravated by the poor outlook for frail economies kept on life support by money pumping. This recent weakness was presaged by the strongly bearish COT, which we paid attention to. However, the COT has moderated significantly over the past several months and the situation in the Mid-East continues to deteriorate to the point where it may very soon outweigh the other bearish factors to generate a rally. We will now look at the reasons why a rally in oil and oil shares looks imminent.
On the 8-year chart for Light Crude we can see that oil's recent drop looks rather modest in the larger scheme of things, and that it has not broken down from the Ascending Triangle pattern that has been forming for years. While Ascending Triangles are normally regarded as bullish, this one has taken so long to form that its otherwise bullish implications are viewed as having been cancelled out by the inflation that has occurred during its development. Right now it is just above the lower boundary of this Triangle, so if it going to turn higher, this is the point at which it must do so. A breakdown from the Triangle would be expected to lead to a steeper drop, initially to the support level shown, but that does not look likely over the short to medium-term.
Click on the chart above to pop up a larger clearer version.
What about oil stocks? – overall it has to be said that the long-term oil stocks index charts still look good, although the convergence of the long-term uptrend channel shown on the 8-year chart for the XOI oil stocks index below reminds us not to forget the lurking general crash risk. In the last update we observed that the index was still close to the top of this channel, and thus vulnerable to further weakness, which is what we saw. Now it has reacted back quite steeply to a still rising 200-day moving average, which promises an immediate reversal to the upside, especially given the continuing deterioration in the Mid-East situation.
Click on the chart to pop up a larger clearer version.
Chart courtesy of www.sentimentrader.com
October 1st, 2014
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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