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CHART ANALYSIS


$50 Oil?

05/27/04 08:16:09 AM
by Gary Grosschadl

Although it sounds outlandish, $50 oil looks like a possibility on this chart.

Security:   $WTIC
Position:   Hold

Today crude oil for July delivery rose $1.79 to close at $41.72, beating last week's closing high of $41.55 - the highest in 21 years. This has the attention of everyone including the unfortunate fellows at the gas pumps.

To get a longer term perspective on this, I consulted a longer term monthly chart. What is suggested here is a powerful upleg in a rising channel pattern. By extrapolation, a surge or spike to the upper trendline would result in $50 oil. Should this occur, the main indexes could be battered as economic woes would grow, even if it turns out to be a brief spike. Gold, on the other hand, could surge up as inflation concerns are factored in.

Monthy oil chart going back 14 years.
Graphic provided by: Stockcharts.com.
 
Several indicators are worth a look as traders try to gauge what may transpire. The topmost graph shows a strengthening trend, not an overheated one, implying more upside potential. The ideal DMI (directional movement index) has the ADX rising in a good upslope, between both DIs as shown. Some traders prefer to see an ADX value above 25 to confirm a strong trend but a good upslope above 20 always gets my attention. The MACD (moving average convergence/divergence) hints at more upside room when looking at its previous peak. The two lower indicators reflect a toppy zone being reached, however a strong and rising trend could sustain a toppy level for an extended time as was the case back in 2000 when oil spiked up to the upper trendline.

Note the dramatic swings in oil prices. Oil has more than tripled from 1999 to 2001, going from $11 to $38. The subsequent year the price dropped 50%. The following year it doubled again from $20 to $40. In 2003 the price of oil dropped back down to a more reasonable level of $25. Should this current long-term upswing (off $25) cause the crude price to double again, then $50 oil is a possibility.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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