Is the oil run over?
Lots of chatter out there as to whether or not the commodity bull is dying, or just catching its breath. Some reporters are even correlating a 20% correction in oil to the beginning of a bear market. I am not particularly bullish on commodities at this stage, but the 20% rule is a complete fallacy. From July 2006 to January 2007, oil saw a 35% correction only to climb to new highs in 2008. Gold experienced a +20% correction and survived. Commodities do not trade like equities, although recently that rule has been thrown to the wolves. What matters is not the size of the correction, but where it stands on a relative basis to longer term moving averages and trend lines.
In this respect, the oil chart is clear: it's still a bull market. Granted, we are approaching an important test. The 10 month moving average, first line of defense, is not far away, at 109.95. It also coincides with the five year trend line resistance breakout we saw in early January (dotted line). Should we lose 109, applying projections puts support at 92.61, 85.15. 80.95 and most importantly, 75.72, 61.8%. The 70 area is also home to the 50 month moving average, the de-facto long term bull market support for oil. If we do hold 109 and make new highs, these numbers will no longer be valid. But for now, use these as an overall guide for support and resistance.
In conclusion, calling a bear market in commodities is not yet supported by the charts. However, a break below 109 could easily see a drop to 70/80 in a relatively short period of time.
This entry was posted
on Saturday, August 23, 2008 at 8/23/2008 10:28:00 AM.
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