From the February 01, 2011 issue of Futures Magazine • Subscribe!

Tech Talk: A long and short crude play

Those suffering acrophobia need not apply for the job of crude oil trader, not this year. The hanging man on the weekly and annual candlestick charts suggests a short-term pullback is imminent and may have begun on Jan. 3 (see "Ready to retrace"). The inability to breach resistance at $92.65 confirms the downside is vulnerable. The first line of support is $87.45, but that is not apt to hold. Major support and the downside objective for those bold enough to establish a short position above $90 is $84.97.

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Not only is that the spot to cover a short position, but a great location to initiate a fresh long if you miss the short play. The weekly parabolic is long with the stop set at $83.01, making that long at $84.97 fairly low risk. On a daily, weekly and monthly time frame, the slow stochastic is at or near overbought levels, indicating the market needs to correct to the downside before being able to rally again.

The preponderance of longs being held by speculators in the Nymex WTI crude contract is also an indicator that a washout to the downside would be needed to attract fresh buyers. As of the week ending Dec. 28, non-commercials were long 162,550 contracts of crude futures, just 14,000 off the all-time high, according to Commitment of Traders data from the Commodity Futures Trading Commission. For the emboldened bulls who are willing to establish a fresh long as the market is in what may end up looking like a freefall, but will in actuality be a quick spike down, the first upside objective will be around $103.50, the 61.8% retracement of the move to $32.48 from $147.25 in 2008. Should the market breach $103.50, the last line of resistance is $110.90. While profit-taking at that level would be prudent, resist the urge to initiate a fresh short. Wait and buy into strength if the market breaches $110.90. Conversely, wait for the blow off top to get back in on the short side. Remember, few people can withstand high altitudes.


Linda Rafield is a senior oil analyst at Platts and editor of the weekly publication "The Futures and Derivatives Review." For more information on the weekly publication, go to www.platts.com.

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