Crude Oil and the Dow Jones Index…a Close-Up

Oil’s trading at around $130 today, reader. That’s a 12% decrease since the high posted on July 11th. It seems more and more that oil is the architect behind a turnaround in share prices and economic forecasts. The bulls may be coming out of hibernation.

But our focus today is oil itself. That’s where the market is focusing. Oil’s what equity traders are looking at.

The big question: is this short term selling or a medium-term switch in trend? I mean, in early June, the oil price slipped from US$135 to US$123. Then it bounced back again.

Really, there are a lot of questions over the oil price at the moment. Does this correction mean we won’t reach the levels of $200 or even $250 that a few analysts have forecasted? Or is this a consolidation phase before renewed strength?

We can’t answer all of those for you. Some of them depend on the future. But we can definitely clarify the charts for you…and why they’re more important today than ever.

Obviously nothing has really changed on the fundamentals side. Master Card recently announced that in June US petrol purchases decreased by 3.9%. And that’s not a new trend. US crude demand has been lower all this year.

But the funny thing is, fundamentals aren’t moving the price any more – in either direction. The ebb and flow of military activity in Nigeria, for example.

Normally when militants offload a few rounds, the oil market perks up. Not today.

That doesn’t grab you? Well, US crude inventories have decreased by 6 million barrels this yea. That should have knocked oil prices up a notch.

And that is what makes this oil price move an example of trading flows. In this scenario, anything can happen. Speculation-driven moves are basically volatile, unpredictable, often wild, and without any apparent logic.

Except the logic of making profit of course! That’s why the technical analysis is more helpful than usual here. It maps out the playing field through the eyes of a trader. You can see what the pros see. So hurry up and take a look.

The first support traders will look at is around $121/122. That’s the first target.

The key moment in oil was when the price action crossed below that medium-term support line. It has been tested and validated several times (points A, B, C and D). The rally drove the prices from $85 to $148, a rise of 74% in 5 months and a half only. It’s perfectly understandable now that oil should fall just as quickly.

So we’re still about seven or eight bucks away from the part where the market finds strength. The other supports are around $111, $98, with a monster at $83. If support at $121 falls, we’ll let you know more about the others. That’s how oil is shaping up.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

Gabriel Andre
for Markets and Money

Gabriel Andre
A former Futures and FX trader/portfolio manager, Gabriel Andre has worked in several hedge funds and asset management firms, both in Europe and Australia. He is a contributing editor to both Diggers & Drillers and the Australian Small Cap Investigator.

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