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Purely Technicals' Blog

PT - Oil Spill

Purely Technical Weekly Newsletter (January 7, 2007) - Featured Article:

The following is a featured article from this week's Purely Technical.

You can subscribe to the Purely Technical weekly newsletter, by visiting our homepage at www.themarketmessenger.com and filling in the form titled "Join Our Newsletter".

Here is the featured material...

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Oil Spill – Crude Breaks Crucial Support Level

Crude oil broke an important support level, at 57.5, this week. This energy commodity is now perched just above yet another crucial support-level, at 55.0.

Let’s take a look at the Monthly, Weekly and Daily charts of Crude in order to see just how much damage has been done to the uptrend. We start with the monthly linear chart…

The monthly chart shows that crude has traded within a bull channel for the better part of the last decade. Despite the 30% decline, from the mid-’06 highs, the commodity is still trading over 10% clear of the lower channel line. There is a good chance that any continuation in the decline over the near-term will find support at that line, which is currently in the vicinity of $51.0.

Looking at the momentum indicators, we see that the monthly RSI is attempting (the current month is not over) to plant a negative centerline crossover on the charts. The presence of the negative divergence, seen coincidental with the mid-’05 and mid-’06 peaks, taken together with any negative centerline crossover will be seen as a strong long-term sell signal. So, we’ll be watching this chart closely at the end of the month to see where price and RSI close the month.

On to the weekly charts…

We’ll be looking at two weekly charts of Crude; the first one is a logarithmic chart that also shows weekly RSI and MACD, and the second one is a linear chart.

 

The weekly chart does a good job of showing us some of the wounds that have been inflicted on the chart of Crude over the recent few weeks. For example, take a look at the potential ramifications of the breaking, this week, of the important level of 57.50. That level had variously provided support or resistance over a few weeks in early- to mid-’05, in late-‘05 and then in late-’06.

The other important level of support near current price is the level of the Oct’04 peak (55.0). Crude declined as far as 54.90 this week before closing at 56.31. 55.00 is also the current level of the weekly Bollinger Band, so it is possible that the index can find some support here for the short-term. 

The upper blue line drawn on the chart connects the weekly closing peak from early-‘03 with that of mid-’05. The lower blue line is drawn parallel to the upper line and when projecting the same from the late-‘03 trough, we can see that the late-’06 trough found support, albeit for a short period, at this line. The selling over the past week has caused a breaking of that (lower blue) line as well.


 

The following chart is a linear chart – as opposed to the previous one, which was a log chart – of weekly action on Crude.

This chart shows the breaking and retesting of a 3-year rising trendline that had proven to be support several times during 2003-’04. The rising trendline was actually broken in September of last year after a steep selloff over the preceding 2-3 months, but price was unable to continue its decline much further after that breakout. Instead, it consolidated for a while before attempting – a few times – to break back above the broken trendline, last month.

With the action over the past two weeks, we can now see that the retest is complete and prices have been pushed lower.

 

Let’s now zoom in a little further – into the realm of the daily chart – and see what price targets we might be able to gather from recent action…

This daily chart of Crude oil shows us the potential for massive declines over the next few months, especially if the commodity cannot pull itself back above 57.50 in the near future.

This call stems from the fact that there is what looks like a neat head and shoulders top on the chart of this commodity. Although the shoulders are a little smaller than might be the textbook case, there is relatively good symmetry between them, in height and girth.

If this pattern turns out to be a bonafide head and shoulders top a target will be found near the $40.0-area, which is nearly 30% below current prices. (The pattern will fail if the neckline is breached to the upside, i.e. prices move back above 57.50).

 

Looking at the momentum indicators, we see that RSI is getting oversold; however, if we take a look at what happened the last time this occurred (early-Sept), we can see that an oversold RSI reading in itself does not mean that a short-term bottom has been reached. Additionally, if we look at MACD we see that that momentum indicator is nowhere near oversold; in fact, it has reset itself at the 0-line.

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Other Articles inside the current issue:

  • Market Wrap-Up
  • Metals: Losing Their Sheen?
  • Major Stock Market Indices – Where to next?
  • Options Theory: Options Strategies– Long Calls

    • ______________________________________________________

    You can subscribe to Purely Technical weekly newsletter, by visiting our homepage at www.themarketmessenger.com and filling in the form titled "Join Our Newsletter".

    We look forward to being your best source for technical market analysis, stock picks, options picks and education in technical analysis and trading.

    ______________________________________________

     

    Have a Great Trading Week!

    Asher Pinto

    TheMarketMessenger.com

     

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    Published Monday, January 08, 2007 6:57 PM by Purely Technical
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