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Crude's Rude Bull Mood

09/18/00 02:31:37 PM
by David Penn

When did YOU think crude was going to hit a top? If the December crude has anything to say about it, the answer just might be: not anytime soon.

Security:   CLZ00
Position:   N/A

A famous trader once remarked that he had no problem with volatility--as long as it was up. That trader could have been speaking about the market for crude oil, which has exploded in the second half of 2000. Oil prices reached 10-year highs in mid-September, breaching the $36 per barrel level before briefly (and marginally) retreating. These are historically significant price levels, comparable both to oil prices during the Gulf War buildup and the oil shocks of the 1970s. And while lower oil prices are far and away the preference of most everyday people around the world, the question takes on a slightly different cast from a trader's perspective: when is the trend going to end?

Anticipating the end of a trend can be a nasty business. While great profits can be made by successfully picking the point at which a trend loses steam, the losses are greatest when a trader tries to buck a strong trend and fails. Another problem with anticipating the end of a trend is that the objective goal of searching for trend reversal signals can easily turn into the subjective error of wanting a trend reversal so badly that evidence begins to appear where it does not really exist.

Note: 4-day moving average breaking beneath 9-day moving average in area circled above.
Graphic provided by: FutureSource.
The chart of the December light crude oil contract, for better or worse, provides opportunities for those wishing to delude themselves into believing that a top in the oil market is imminent, if not already passed. The chart tracks three different moving averages of December crude: a four-day, a nine-day, and an 18-day. And December crude has been moving just ahead of these averages since May. However, as December crude reached its September high, the four-day average ducked under the nine-day, suggesting that the trend may be starting to moderate.

But the quick, downward movement of the four-day moving average--even if it crosses beneath the nine-day moving average--has more to do with trading activity at the top than with the trend of December crude. In fact, the bearish patterns in the price ranges (closing prices lower than opening prices, and closing prices near the low) for December crude in September reflect some profit-taking, which is imminently reasonable given the price run up. But crude prices subsequently climbed higher. Obviously some of the most recent jump in oil prices comes in response to new provocations by Iraq toward Kuwait's northern oil fields, and a storm off the coast of Mexico that adds new threats to the U.S. oil supply. But from a technical perspective, the intermediate trend in oil prices (represented more by the 18-day moving average than by the four) remains strong and unbroken.

What MIGHT signal a break in the trend? Given the possibility of oil prices continuing to run (only Saudi Arabia apparently has the spare capacity to increase production, and any additional production would take some time to work its way into the market), the only reliable signal of a break in the trend would be a break in the trend. More downward movement from the averages. More bearish patterns in the price ranges. Maybe even some shift in the fundamentals of the oil market: increased oil production from OPEC or, more dramatically, an opening up of the 600 million barrel U.S. strategic petroleum reserves. But those not currently squeezing more longside profits out of oil are probably in better shape sitting out the advance and looking for opportunities to profit on oil's (eventual) way down.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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