Is Crude Oil Ready To Run?

10/18/05 01:35:37 PM

by David Penn

With crude oil futures correcting toward the lower end of their multimonth trend channel, oil stocks continue to warn of weakness.

Security: CL, OIH
Position: N/A

The bull market in crude oil futures over the past year has been a thing of beauty--as far as commodity bull markets go. So many commodity bull markets are so volatile that many players end up shaken out of good positions simply because the big moves against them come often enough to prevent traders from sticking around for the even bigger moves that often follow.

Crude oil futures have provided few of those sorts of curveballs to throw traders off-balance. While the breakouts in crude oil have not been of the "don't look back" variety (see my "Building A Better Breakout," July 1, 2003; Working-Money.com"), they nonetheless have been impressive, with prices retracing only slightly into their prebreakout ranges. Crude oil, basis continuous futures, broke out above 50 in February, ran to 58 in March, and pulled back to 48 in May, where they bottomed. More recently, crude broke out above 59 in June, slipped as low as 57, then ran to 70.

Graphic provided by: Prophet Financial, Inc.

The current correction in crude oil has taken prices back to the most recent breakout level in the low 60s. Additionally bearish are the repeated closes below the 10-day and 50-day exponential moving averages (EMAs). The lower end of the trend channel that has encompassed most of crude oil's movement since December 2004 looms as support in the high 50s.

But the most significant technical development in crude oil might instead be the multiple positive divergences in the MACD histogram and in the 7,10 stochastic. While crude oil has worked itself lower from late August to early October--with a low in early September and a lower low in early October--both the MACD histogram and stochastic were marking higher lows. While it is possible for crude oil to work lower--even as the MACD histogram and stochastic edged higher, creating a running or multiple divergence--it is also quite possible that crude oil is nearing the end of its correction, and setting up for a move on the late August highs.

Does the behavior of oil stocks jibe with the possibility of crude oil moving higher? There has been much talk about the drubbing that oil stocks have taken in recent weeks, and the charts of these stocks do not lie. However, if crude oil is to make another push higher, would it be out of the question for oil stocks to stage a significant test of the highs bounce at the same time--even if the ultimate destination of both is lower?

Graphic provided by: Prophet Financial, Inc.

For what it is worth, there is talk about Tropical Storm Wilma, which many weather observers are anticipating will soon become Hurricane Wilma. Wilma is expected to arrive in the US by the October 21-22nd weekend, and its projected Gulf of Mexico trajectory has many worried that oil rigs in that area will get hit hard--with the resulting bullish impact on crude oil prices. I am no weatherman. But that kind of phenomena--and, more important, its timing--is consistent with a crude oil futures chart that appears to show the end of a correction, and a oil stock sector chart that is deeply oversold and, perhaps, more than ready to bounce.

David Penn

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

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