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Oil Market Update

Clive Maund
support@clivemaund.com
November 20, 2007

 

Oil remains in a long-term uptrend and although it has backed off over the past week or so, having become extremely overbought, on the long-term chart we can see that it can continue to rise to the $110 - $120 area before it is seriously constrained by the upper return line of the uptrend channel. We can see just how overbought it got by looking at the MADC indicator shown at the bottom of the chart, which went “off the scale”. Hence the reaction of the past week or so. The bullmarket in oil only really got underway in earnest in 2004 when the price broke above the resistance level associated with the highs of the early 90’s. Given recent prices it is hard to believe that oil was trading at only about $12 late in 1998, yet the chart shows that this was the case.

The year-to-date chart shows recent action in more detail. On this chart we can see how the price broke out above the upper return line of the channel that had been in force for most of this year, the margin of the break suggesting that the uptrend is accelerating and that a new channel needs to be drawn. A tentative steeper channel has been drawn and oil is viewed as a buy on an approach to the lower channel line near its 50-day moving average, although it is considered prudent to close out positions if the price breaks below it, as this would likely lead to a reaction back to the old channel support. Traders should note, however, that the new channel line is very steep, and while it may succeed in driving the price quite quickly towards our objective at the return line of the major uptrend channel shown on the long-term chart, which is what we are looking for, failure of this steep uptrend is likely to lead to a prolonged period of consolidation/reaction.

Given the strong gains in oil in recent weeks, oil stocks have put in an insipid performance. This is thought to be due to the substantial drop in the broad market during the same period. There may also be a political dimension to this in that oil companies in the US may be under pressure not to raise gas prices, which may be preventing them from passing along the price increases and taking the opportunity to engage in a little price gauging for good measure at the same time.

The 5-year OIX oil index chart shows the strong uptrend in force from early 2003. While the index is still a long way from breaking down there have been signs of it losing vigor in recent weeks. We have already considered the poor relative performance given the strong gains in oil during much of October and into November and on this chart we can see that it has not had the strength to run to the upper return line of the long-term uptrend channel, even with oil making a dash towards the $100 level, instead remaining constrained by resistance in the vicinity of the return line of the less steep inner uptrend channel, shown in light blue on the chart. This is viewed as a warning sign, which is thought to presage future weakness, either as a result of oil turning lower, or as a result of a serious downturn in the broad market, which would be the more likely cause. One scenario is that oil runs quickly towards our target in the $110 - $120 area, oil stocks as represented by the OIX oil index make only modest gains, as in recent weeks, possibly due to being restrained again by broad market weakness, and then turn seriously lower as oil reacts, having hit its target.
Clive Maund
support@clivemaund.com
November 20, 2007

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and lives in Copiapo, Chile.