Crude Warns Lower

06/07/04 09:21:33 AM

by David Penn

A major MACDH trough suggests that the top in crude oil futures may be in.

Security: CLN4
Position: N/A

In a bull market, think of a major MACDH trough as a sort of fault line, a crack in the foundation, as it were. And the physical facts of the matter are that the deeper the crack is, then the more damage to the foundation when stress is applied.

It is important to recognize that July crude oil futures are in a bull market. That bull market may end tomorrow, today, or before you arrive at the end of this paragraph. But for now, the bull market is intact and profitably fading bull markets is a rare feat indeed. It is also important to recognize that, at present, July crude is sitting on support at its 50-day exponential moving average (EMA). The 50-day EMA is a solid intermediate trend indicator and pullbacks to the 50-day EMA are often followed by powerful moves to the upside.

The deep MACDH trough in early June suggests a powerful bounce, and perhaps an even more powerful correction afterwards.

Graphic provided by: Prophet Financial Services, Inc..

Nevertheless, as I have written in Traders.com Advantage and in Working-Money.com, deep MACDH troughs during bull market corrections can often help traders and investors determine the difference between a buyable dip and a correction that will lead to even further declines. Observe how the two pullbacks to the 50-day EMA featured in the chart -- one in early February and another in early April were also accompanied by significant dips in MACDH. In both cases, prices rebounded -- although there were minor corrections in each instance when the old high was tested. Generally speaking, traders should expect something similar with the early June correction.

However, it is after any mid-June bounce that traders to the long side need to be particularly concerned. While I would not at all be surprised to see July crude rally to test the $42 level, the severity of the MACDH trough in early June tells me that the bears are stronger than they have been in months -- far more so than during the corrections of February and April. While this does not mean that July crude topped out on June 1, it does suggest strongly that the balance of power may be shifting from bulls to bears, and that the market may be setting up for a reversal.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Crude Warns Lower

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