Examining oil, oil stocks and the oil-gold link

Now, let’s zoom in on our picture of the oil market and see the weekly chart. 

On the above chart we see that last month’s increases led light crude’s price to over $108 per barrel and the price target for the inverse head and shoulders pattern was reached. This positive event encouraged investors to take profits after three weeks of growth, and the price dropped slightly to above $102 per barrel. Despite this decline, oil bulls didn’t give up and WTI climbed above $108 once again.

As you see on the weekly chart, the recent weeks have formed a consolidation. The inside bar candlestick pattern is worth mentioning at this point. It is characterized by the inside candle’s price action being completely covered by the price action the week before. According to theory, if the buyers manage to break above the resistance level (the July top), the price target for the pattern will be around the May 2011 top. However, we might also see a bearish scenario: if the price drops below the support level (the August bottom), the price target for the pattern will be around the previously-broken neck level of the bullish inverse head-and-shoulders pattern (currently slightly below $97).

Please keep in mind that there is a strong resistance zone based on the March 2012 top and the upper border of the rising trend channel which may encourage oil bears to go short and trigger another corrective move. However, the outlook is more bullish than not at this time.

Now, let’s check the short-term outlook.

In this daily chart, we see that the situation hasn’t changed much in the recent days.

In the days following the invalidation of the breakdown below the July 30 low, the price of light crude rebounded. That increase led light crude's price to over $108 per barrel once again. In this way, the oil bulls almost touched the August high. However, closeness to this resistance level encouraged investors to take profits one more time.

Although light crude declined in the first half of last week, the proximity to the bottom of the previous corrective move (the August 8 low) encouraged buyers to act and light crude climbed to over $106 per barrel on Friday.

Please note that the recent correction is very similar to the corrective move from the June 19 top to the June 24 bottom. From this point of view the short-term situation is bullish.

Additionally, when we factor in the Fibonacci price retracements, we clearly see that the correction is quite small because it hasn’t even reached the 38.2% level. In my opinion, this is definitely a bullish factor.

On the one hand, if the buyers manage to push the price higher, the first price target will be the July top. The second one will be the March 2012 high and the next one – the May 2011 top.

On the other hand, it’s worth mentioning that if the oil bears show their claws once again and successfully push the oil price below the August low, we may see a bearish double (or even triple) top pattern. According to theory, the price target for the pattern is around $96.50 per barrel.

However, before the sellers will be able to realize their scenario, they will have to break below several support levels. The first one is the upper line of the rising wedge (currently close to $102). The second strong support zone is based on the June top and the April high (slightly below $100). This area is also supported by the bottom line of the rising wedge and the 38.2% Fibonacci retracement level. There is also more support based on the 50% Fibonacci retracement level around $97.50.

Summing up, technically, the short-term outlook for light crude is bullish and the uptrend is not threatened yet. The recent decline is still shallow and very similar to the corrective move from the June 19 top to the June 24 bottom, which is a bullish sign. However, taking into account the strong resistance zone on the weekly chart and the potential double top pattern, a confirmation of a breakout above the July top or a breakdown below the August bottom might be worth the wait.

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