Oil Price Technicals -- A Picture of Shifting Supply & Demand ~ Steve Blitz Morning Notes
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Monday, June 22, 2009

Oil Price Technicals -- A Picture of Shifting Supply & Demand

Oil is a key indicator for the turn in the economy and, as my last post illustrated, for when the yuan is going to resume revaluing to the dollar. Technical analysis of price action isn't mystical -- price patterns reflect shifts in the balance of supply and demand -- how people are voting their money rather than their opinions.

The chart below is the daily spot dollar price for Brent crude (this is an index so divide by 10 to see the actual price). The move from the low set year end has a decided counter-trend price pattern and has barely retraced more than 23.6% of the decline that began in July. The current run also looks a bit exhausted as prices broke through their channel ceiling and have since pulled back to the top of the channel. The daily slow stochastic is giving a sell signal as it breaks down through 80.

So the daily chart gives every indication that the six-month oil market run has topped out but I wouldn't put the big bear hat on just yet. The price is still above some important moving averages that now look like support and commodities typically retrace 50% of a trend move before the trend resumes. In addition, commodity prices almost always have that counter trend look to them when coming off a bottom -- as opposed to stocks and bonds. Lastly, the weekly chart (see below) is still signaling higher prices.

In sum, oil prices are taking a brief breather before the uptrend resumes. The 50% retracement level is $80, also a level where some believe China will resume yuan revaluation to the dollar. Look for oil to hit $80 before any serious down move could resume -- if it does resume.

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