Post by TradingForGod on Aug 30, 2004 17:18:01 GMT -5
The last time we talked about crude, I listed the myriad reasons why WTI should be nearing a significant top. It had achieved all the price targets, there was a “blow off top” character of the rally, speculative open interest was going down, there was a big momentum divergences, etc., etc. If I had stopped right there, I would be looking pretty smart. BUT, at the end I threw in this little gem: “But frankly, unless there is some “event” like peace breaking out in the Middle East, I think we are at least a week away from any kind of major reversal.” It turned out that we were about 10 minutes away from a major market reversal. Crude prices opened lower last Monday and have not looked back since. As of today, oil prices are over $6 off the highs just seven sessions ago. Clearly the market has reversed in a VERY convincing fashion. What happened? And just as importantly, how did oil reverse so dramatically without an “event”.
I was using as my model for the price activity lately the run up in prices ahead of the Iraq War last year. The first chart below is of April’03 crude oil. You can see that, just like now, prices had rallied $11 in a little less than two month. Prices shot higher in a “crescendo of buying” into the high only to fall back almost immediately. But look at what happened next. Prices chopped around just above the 20-day MA (yellow line) for a little over a week before finally breaking lower. Once the 20-day MA broke, prices immediately fell back to the 40-day day MA (blue line) which held for a couple of more days before prices collapsed all together. Crude oil fell a little over $9 is six sessions.
That’s sort of what I expected to happen this time…a somewhat gradual erosion of the technical picture followed by a sharp collapse in prices. I got it all right, except for the part about the gradual erosion of the technical picture.
The chart below shows the October (front-month) crude contract right as of today. You can see that the rally looks pretty similar to the one last year. But the sell off does not! Prices went from straight up to straight down all in one fell swoop. Note by the way the huge shaded bar the day the high was made. In candlestick chart lingo this formation is called a “bearish engulfing pattern”. That’s when price open at a new high and close below the previous day’s low. As the name implies, the formation is…well…bearish. Crude broke the 7-day MA the day after the high was made, the 20-day MA two sessions later, and the 40-day MA just three sessions after that. This type of price collapse in the face of very positive MA structure is very, very unusual. It usually only happens when some big event occurs. Last year, it was the successful war effort and securing of the Iraqi oil fields with little damage. But this year, there was no such event. Prices just collapsed under their own weight.
Actually, there is a lot of oil floating around in the world. OPEC countries are producing like crazy right now. People just couldn’t seem to “find” all of it on the ships moving around in the ocean. Well, apparently all that “lost oil” has been found because my friends in the oil business tell me the market fundamentals look very weak at the moment. But then again the fundamentals were weak as WTI rallied from $44 to $49 in a little over a week earlier this month. Ah, the joys of trading.
So where do we go from here? Believe it or not, crude oil has already corrected over 50% of the rally since early July. The 62% (Fibonacci) retracement is at 40.50. Below there is the long-term uptrend support at 38.50. Either of those targets would be decent objectives. Under normal circumstances you would expect some sort of rally, or at least consolidation, after the steep decline we have just seen. If prices rally back to the 20-day MA at 44.70 in the next few days I think that would be a great selling opportunity. However, the market is not behaving normally right now, and we might not see that kind of rally.
The speculative funds have been steadily exiting their length over the last week, but they are still at least partially long right now. I doubt crude will quit falling until they quit selling.
Blessings to you all,
TFG
p.s If any of you have a favorite stock or commodity that you would like to see analyzed here, please let me know.
I was using as my model for the price activity lately the run up in prices ahead of the Iraq War last year. The first chart below is of April’03 crude oil. You can see that, just like now, prices had rallied $11 in a little less than two month. Prices shot higher in a “crescendo of buying” into the high only to fall back almost immediately. But look at what happened next. Prices chopped around just above the 20-day MA (yellow line) for a little over a week before finally breaking lower. Once the 20-day MA broke, prices immediately fell back to the 40-day day MA (blue line) which held for a couple of more days before prices collapsed all together. Crude oil fell a little over $9 is six sessions.
That’s sort of what I expected to happen this time…a somewhat gradual erosion of the technical picture followed by a sharp collapse in prices. I got it all right, except for the part about the gradual erosion of the technical picture.
The chart below shows the October (front-month) crude contract right as of today. You can see that the rally looks pretty similar to the one last year. But the sell off does not! Prices went from straight up to straight down all in one fell swoop. Note by the way the huge shaded bar the day the high was made. In candlestick chart lingo this formation is called a “bearish engulfing pattern”. That’s when price open at a new high and close below the previous day’s low. As the name implies, the formation is…well…bearish. Crude broke the 7-day MA the day after the high was made, the 20-day MA two sessions later, and the 40-day MA just three sessions after that. This type of price collapse in the face of very positive MA structure is very, very unusual. It usually only happens when some big event occurs. Last year, it was the successful war effort and securing of the Iraqi oil fields with little damage. But this year, there was no such event. Prices just collapsed under their own weight. Actually, there is a lot of oil floating around in the world. OPEC countries are producing like crazy right now. People just couldn’t seem to “find” all of it on the ships moving around in the ocean. Well, apparently all that “lost oil” has been found because my friends in the oil business tell me the market fundamentals look very weak at the moment. But then again the fundamentals were weak as WTI rallied from $44 to $49 in a little over a week earlier this month. Ah, the joys of trading.
So where do we go from here? Believe it or not, crude oil has already corrected over 50% of the rally since early July. The 62% (Fibonacci) retracement is at 40.50. Below there is the long-term uptrend support at 38.50. Either of those targets would be decent objectives. Under normal circumstances you would expect some sort of rally, or at least consolidation, after the steep decline we have just seen. If prices rally back to the 20-day MA at 44.70 in the next few days I think that would be a great selling opportunity. However, the market is not behaving normally right now, and we might not see that kind of rally.
The speculative funds have been steadily exiting their length over the last week, but they are still at least partially long right now. I doubt crude will quit falling until they quit selling.
Blessings to you all,
TFG
p.s If any of you have a favorite stock or commodity that you would like to see analyzed here, please let me know.