Crude Oil Thinks the Rally is Toast

Crude Oil Thinks the Rally is Toast

Fellow contrarians know that we’ve been watching the crude oil market for a sign of where this rally may be heading.

Right now, crude looks absolutely gassed.  It dropped below it’s 200 day moving average last week (yes, the 200-day MA that we love to watch) – and has just managed to bounce up a couple of bucks today, still well off it’s recent high.

Crude Oil Price ChartCrude dropped below it’s 200-day SMA last week – uh oh.

Source: StockCharts.com

The astute trading minds over at Diamond Slice concur that something is amiss in the crude market:

The BP Gulf spill, gasoline demand reaching 3.5% yoy, prices at the pump at $3.00, refinery capacity above 89%, Cushing, OK crude storage dwindling to 14 million barrels, tankers holding countless barrels off the coast, OPEC members breaking quota, unrest in Iran, and sovereign default contagion in Europe have been on the radar of “black gold” speculators for the past two months. These realities are the extension of maturing trends over the range bound past two months, but only one has significantly altered WTI Crude prices. A casual deduction might blame oil’s price destruction on a stronger Dollar, due to the recent flight from all things Euro. Contrarily, we see default risks in the EU and retrenching speculation creating the vacuum through which industrial commodity prices, most notably Oil, will fall.

You can catch their complete crude oil outlook here.

Crude is probably still a bit oversold in the short term, and so it’s pop here may continue into the week further.  It will be interesting to see if it makes a “lower high” before turning south again.  That potential move, along with a subsequent drop once again below it’s 200 day MA, would be a strong bearish signal – both for crude, and for broader financial markets too.

Remember, topping processes don’t occur overnight – it happens as individual markets gradually split away and roll over.  It’s already happened to China – now oil –  and likely US equities.  Looks like this baby is going down – should be an interesting week!

  • Much appreciated hat tip there Brett… Indeed, we are planning to add to our short oil position this week as short term consolidation on the $1Trillion EU Purchase Fund lifts the WTI price per barrel of Crude towards $80. If the price hits $80 we’re going to go heavy short crude oil. The details of the EU purchase plan need to be revealed, but the long and short of it is that Germany and France are bailing out the PIIGS. I think the “for better and for worse” of this union has now been consecrated.

  • Brett

    Thanks for the comment Robert, I love the analysis you guys do. Thx for the update on your position…interesting to see the price weakness in crude, not much follow through on this bailout rally.

    That’s my armchair understanding of the bailout too, with perhaps the US as the ultimate backdrop for this via the IMF…I just don’t see how this is anything other than “kicking the can down the road”.

  • Pingback: Oil Prices as a Leading Indicator for Stocks — The Contrary Investing Report()

About Author

Brett

Hi, I’m Brett Owens – and I’m a financial junkie. My “problem” started incollege, when I got a little dose of the stock market – man, was I hooked…in no time, I was reading the Wall Street Journal religously.

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