The crude oil market has been stuck in a range, confounding expectations of an energy price-fuelled inflation, resulting from the easy money policy of the US Federal Reserve Bank.
Most other commodities have rallied due to the easy policy, but not crude oil. For instance, from its low in January 2009 till November, copper has jumped almost 162 per cent. Crude oil on the other hand just rallied 36 per cent from January 2009 to November. Gold rallied 66 per cent as of November and silver has rallied a whopping 149 per cent in the same period.
Technically speaking, the reason for the weakness in crude oil is clear. After falling from a peak of $123 a barrel in July 2006, crude oil consolidated in the range of $94 to $99 for six months between January 2007 and June 2007. From the consolidation area, crude oil broke out to touch an all-time high of $183 in July 2008. After that, the price fell dramatically to touch a low of $56 in February 2009.
Crude oil then rallied to touch $94 in October 2009 and has since been range bound between $72 and $94. Note that $94 was the six-month consolidation area from where the price rallied. This area was, hence, a support level.
Traditional technical analysis teaches that past support once broken through would turn into resistance when backed up by a price rally. That’s exactly what’s happening with crude right now. The $94 level has been touched about three times since October 2009 and the price has always fallen strongly from that level. This shows the resistance level is strong, due to which the prices are unable to rally. Crude oil must close above $100 for the bull to emerge.
The 30-week moving average used by long-term investors to identify a trend is also flat. In an uptrend, the moving average slopes up with prices above it and in a downtrend the moving average slopes down with prices below it.
Right now, the 30-week moving average on crude oil is moving sideways, with prices going above and below it. This shows a clear lack of a long-term direction.
On a fundamental level, the global slowdown has resulted in demand destruction for crude oil. Precious metals, on the other hand, have rallied as they are considered a hedge against fiat money created inflation. With the Federal Reserve printing money, investors switch to gold and silver to protect the value of their investments. The rise in copper has been attributed to the demand from China. However, there have been “experts” claiming that the Chinese demand for crude oil is also high. But that is not reflected in the price of crude oil.
There will be a lot of “experts” giving reasons for a rally or the lack thereof. However, it’s best to look at the charts to see the true valuation of the markets. In the case of crude oil, don’t expect a big rally unless the prices close above $100. On the downside, crude oil has a lot of areas from where it can bounce and they are $72, $64 and $58.
So, right now the trading strategy would be to buy at $72 and sell/short at $94, with appropriate stop losses.
The author is based in Chicago and is the editor of www.capturetrends.com
