Crude Oil Tests $100 and forms Range

Feb 20, 2008: 10:55 AM CST

I haven’t heard much about crude oil recently (other than it’s expensive) until today, when journalists are bemoaning another test of the $100 per barrel level. Let’s look at the recent history of this major global commodity and what it might mean for the markets:

Three times since November, Crude Oil futures have tested the psychologically significant area of $100 per barrel. Will the third time be the charm that breaks prices through the recent tight and clear channel?

Notice how major support and resistance has developed at the $85 and $100 levels. These areas have become fixed in traders’ minds as levels that have worked in the past and serve as clear targets for stops, entries, and exits.

Eventually, the force of supply or demand will overcome one of these areas, but until then, we can only observe the price action and horizontal channel consolidation.

Notice the recent rapid ascent of the commodity from $85 to $100 in approximately two weeks. This represents massive strength on the side of the bulls.

Now that price has hit resistance, the market faces a major turning point. Should oil break $100 per barrel, it could have massive psychological significance on the US Stock Market (as well as global markets), pushing them lower. It may even be enough to cause US Stock prices to eject from their recent triangle consolidation (indecision) pattern.

Before we get too excited or bearish (or bullish, from a contrarian’s perspective), let’s peek at oil’s weekly chart:

We see the same sort of consolidation pattern on the weekly chart, but we also see a momentum divergence. Momentum readings, as do all oscillators, lose a bit of their significance as price winds down to a low volatility, equilibrium point where swings have narrowed. The divergence is not as strong or telling as the divergence that occurred from October to December 2007, which presciently preceded the major high volatility price move from $52 to $100.

Could price be forming a bull flag style continuation pattern? Let’s hope not but we can’t overrule that possibility. It would seem highly unlikely, but anything can happen in the market.

Let’s continue to keep an eye on this commodity, and others, and focus on what strength here means for the US and global stock markets.

Check out MarketClub or INO.Com for more information and educational videos, including analysis by Adam Hewison on the current state of the gold and crude oil commodity markets.

10 Comments

10 Responses to “Crude Oil Tests $100 and forms Range”

  1. Stock Market » Crude Oil Tests $100 and forms Range Says:

    […] Corey Rosenbloom wrote an interesting post today on Crude Oil Tests $100 and forms RangeHere’s a quick excerptNow that price has hit resistance, the market faces a major turning point. Should oil break $100 per barrel, it could have massive psychological significance on the US Stock Market (as well as global markets), pushing them lower. … […]

  2. Allan Says:

    It’s broken $100 today and the market is rallying. What’s your take?

  3. Felix Says:

    Hey Corey,

    Why does high oil price have such an effect on the economy. As always, excellent post.

    Thanks.

  4. gary Says:

    FWIW there aren’t really any triple tops or bottoms. That would seem to indicate the likelyhood of a breakout is more probabable than a breakdown.

  5. Corey Rosenbloom Says:

    Hey Allan,

    I think odds favor continuation. However, the most recent price swing was quite phenomenal, it the market should experience some sort of retracement or pullback due to profit taking first. The market could have been building a base for higher prices.

    I’ve seen it happen many times when a price (of a stock or commodity) will test a key level a few times, breach it a few times (before falling back) and then eventually it continues higher strongly because the barrier has been broken. Perhaps that will happen again this time.

  6. Corey Rosenbloom Says:

    Felix,

    Thanks – that simple question deserves a very lengthy reply, but I’ll summarize by saying that it increases the cost of transportation both on businesses and consumers. It cuts into profit margins and cuts into family budgets that are already tight. It costs more to transport goods and to go and buy the goods.

    Essentially, higher oil prices (which translate into higher prices at the gas station) serve as a tax on consumers that increases their monthly spending so that they have less to spend on goods and services.

    That’s the short answer. There’s much more to it, of course.

  7. Corey Rosenbloom Says:

    Gary,

    You are correct. You could even say we’ve had both a triple bottom and a triple top occur!

    But the overriding variable for analysis of any pattern is the preceding trend, which has been decidedly up. This carries weight when analyzing any technical price pattern, and due to so many more reasons beyond technical analysis, it seems that the price of oil has greater odds of going higher than lower.

  8. pineapple Says:

    On Oil Prices clearing $100 it is more of the weak US$ that causes everything priced in US$ jump up.
    This year will be commodities turn due to weak US$!

  9. LiggerPig Says:

    The charts are saying there’s bucket loads of stops just above $100 for DaBoyz to take out.
    A “news-related” spike to $107-110 and reversal imo.
    Not long until the $US begins a multi-month rally, give them chance to raid the area below $85 later LOL

  10. Corey Rosenbloom Says:

    Hey Allan,

    I think odds favor continuation. However, the most recent price swing was quite phenomenal, it the market should experience some sort of retracement or pullback due to profit taking first. The market could have been building a base for higher prices.

    I've seen it happen many times when a price (of a stock or commodity) will test a key level a few times, breach it a few times (before falling back) and then eventually it continues higher strongly because the barrier has been broken. Perhaps that will happen again this time.