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TECHNICAL ANALYSIS


Has December Crude Oil Put in a Bottom?

11/11/02 11:46:25 AM
by Kevin Hopson

December crude oil broke out of a bearish rectangle formation early last week. However, the contract bounced off a key retracement level, which could signal a potential bottom in crude oil prices.

Security:   CLZ2
Position:   Hold

I touched on December crude oil (CLZ2) last Monday (November 4, 2002), as the contract had been stuck in a trading range for roughly one week. More specifically, the contract was trading between the $26.50 and $27.50 levels, effectively forming a bearish rectangle formation. This means that the trend prior to the consolidation period was negative. Since rectangle formations tend to be continuation patterns, the logical (but not guaranteed) conclusion was for crude oil prices to break to the downside.

As expected, this came to fruition last Tuesday. More specifically, December crude oil proceeded to break key support at the bottom of its trading range ($26.50). Once this occurred, the contract sold off significantly, thus continuing its downward trend from September's breakout high. However, December crude oil eventually found support in the $25.10 to $25.20 range, site of the 50 percent retracement level from the November 2001 low to this past September's high. Given the extremely oversold conditions and the technical significance of the 50 percent retracement level, December crude oil could have put in a major bottom last week.

Graphic provided by: SuperCharts.
 
However, in order to temper the recent bearishness and give reassurance that a bottom has been put in, December crude oil must overcome broken support in the $26.60 to $26.70 range. This is where the contract had found significant support prior to last Tuesday's breakdown. As a result, there will likely be substantial resistance at these levels. Fortunately, crude oil has one thing going for it - the backing of smart money.

For example, commercial traders (hedge companies) have been building their long positions in the crude oil futures contracts over the past five weeks. Since hedge companies have a physical stake in the commodity, they perform detailed analysis of crude oil prices and are considered by many to be the smart money. As a result, commercials tend to act as a leading indicator for crude oil prices. If this holds true, there is a strong bias towards higher crude oil prices in the long-term.



Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

Glen Allen, VA
E-mail address: hopson_1@yahoo.com

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