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March Crude Oil - A Pause Or A Top?

11/13/09 08:48:46 AM
by Donald W. Pendergast, Jr.

Sometimes a chart pattern can be interpreted a number of ways. Knowing how to see the big picture can help make the job easier.

Security:   CL H0
Position:   N/A

Crude oil has had an impressive run since turning higher earlier this year, having more than doubled in price. The NYMEX March 2010 crude oil contract (CLH0) made it to nearly $84 a barrel a couple of weeks ago, and speculative fever is running high again — after all, everybody remembers how crude shot up from $48 to almost $150 in record time, so why should this time be any different? Read on to see what may lie in store for this vital energy commodities price.

FIGURE 1: CLH0, DAILY. Over, under, sideways, down ... which way for crude oil now? Erring in favor of the big-money commercial short futures position in crude oil might prove to be a wise course of action.
Graphic provided by: Interactive Brokers TWS daily chart.
Nothing fancy here, just a well-formed consolidation pattern that may not need many more daily bars to near completion; at first glance, and especially given the bullish run preceding this pattern, I'd be tempted to say that this pattern would likely resolve itself with a bullish breakout toward new post-crash high, perhaps reaching $90 per barrel. But after reviewing the latest COT (Commitment of Traders) report figures, it seems that the big money commercial interests are holding near-record short positions in NYMEX crude oil futures contracts.

Commercial producer interests typically use the futures markets to ensure that they can sell their goods at a favorable price, whereas commercial consumer interests use the futures markets to ensure that they can acquire the commodities they need at a guaranteed price, no matter how wildly a market may vacillate. Apparently, both sets of commercial interests feel that the price of crude is destined to move lower, hence the massive amount of short positions in the crude oil market. Anyone going long crude oil is betting that they have more brains than the commercials (who have billions of dollars at their disposal and an intimate understanding of the fundamental intricacies of this market) or that the power of existing momentum is enough to keep prices moving higher, as large speculators and hedge funds greedily snap up all of the crude oil contracts the commercials can sell them.

I don't know about you, but I would tend to err in favor of the big money commercials in this instance and would be wary of a fakeout breakout move from the consolidation pattern. In fact, such a fakeout could be an excellent place to initiate a short position (with strict loss control, of course), adding more of a short position on a confirmed break below the lower boundary of the pattern near $78.70 to $78.60. Note that the ParaSar system is already in a short position, with the upper channel of the consolidation pattern moving in tandem with the system's short trailing stop (white dots on chart). See Figure 1.

As for playing the moves in crude, you can use futures contracts (including mini-crude futures) or crude oil–linked exchange traded funds (ETFs) such as USO. Those who play stocks might look for short setups in OIH or in especially weak relative strength oil/gas stocks. With commercial interests taking major short positions all across the commodity spectrum (including the gold, orange juice, heating oil, corn, silver, and copper markets), it might pay to watch for low-risk short setups in any number of commodity-related stocks and ETFs. This could be, as they say, big. Time will tell, as always.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 11/13/09Rank: 5Comment: 

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