Just How Low can Crude Oil Go?

Nov 6, 2008: 2:02 PM CST

I must admit I’ve been shocked by the massive, unrelenting sell-off in crude oil.  Let’s look at the current daily chart structure to see what clues we can glean from price information.

Daily Crude Oil:

Price peaked above $145 in July prior to the global recession realization (or anticipation thereof) and has slid to fresh 2008 lows near $60 per barrel, meeting the forecasts of the most bearish prognosticators and leaving those with bullish targets above $200 per barrel scratching their heads endlessly.  Price is the ultimate arbiter, not our expectations, so we must look at where we’ve come and where we might be headed.

Of course, the simple lesson to learn is “not fight a downtrend” or as usual “do not try to call bottoms” but those axioms seem too simplistic sometimes.  However, had you tried to call a bottom in this market, you would have been sorely disappointed, as there have only been two (or perhaps three) minor counter-trend rallies ever since price broke its rising 20 and 50 day EMAs and found resistance (via a doji) at the cross-over point (in early August) of these averages, which was your first hint lower prices were more likely.

Once price cleanly breached the 200 day moving average, that was your last hope (or last exit) of bullishness and price has unrelentingly fallen – with the September exception – since then.

At present, we appeared to be on a mini-counter trend rally back up to test moving average support, but support – as evidenced in USO (chart below) appears to be strong and holding, despite a positive momentum divergence that is developing.

The Red arrows on the above chart represent new momentum lows as price continued to trend lower.  There was a minor positive divergence in August but it was worked off with little effort as well.  Momentum has continued to accelerate to the downside as price continues to make fresh lows.

It almost ‘feels’ like there should be a bottom at some point – particularly around the $60 per barrel level (let’s get realistic – how low can it go?) but I would argue that – if you share the “it can’t go any lower” view point, you wait for the following before buying:

A clean positive momentum divergence (which may be developing)
A cross above the falling 20 day EMA (or cleanly above $75 per barrel)
A higher swing low form in price (which would be the most conservative play)

Of course, there are other conditions you might choose to trigger entry but until then, it’s probably best to get or stay short or (preferably) stay out long until conditions improve.  After all, it rarely pays to fight a trend as strong as we’ve seen here.

If you don’t (or can’t yet) trade futures but would like to participate in this move, traders often use the USO or the US Oil Fund (among other ETFs, some leveraged such as DIG – ultra long oil and gas or DUG – ultra short oil and gas).

So, let’s look at USO which roughly mirrors the price movements in oil (though not the price per barrel).

USO – US Oil Fund:

See above for chart analysis – there’s no point in stating the same analysis twice.  The reason I included this chart is because StockCharts provides Crude Oil prices on an “end of day” basis and USO is traded intraday so you can see what’s happening right now with the contract (or as of 1:29 EST).  We tipped down for a new low on the year, and the USO is down 7% from yesterday’s close.

Exxon-Mobil (XOM) is suffering a 5% decline while DIG (ultra-short oil/gas) is off 12.5% as of this writing.

For a lesson in volume (and possible capitulation selling or at least ultra-high volume surges), take a look at the volume bars in October for DIG (ultra-short oil/gas).  It’s quite impressive.

Stay safe and guard your capital.

7 Comments

7 Responses to “Just How Low can Crude Oil Go?”

  1. Lakshmi Says:

    Why is it that none of your charts tell what indicators you are talking about? Take a look at the above one. What indicator is it at the bottom?

  2. Corey Rosenbloom Says:

    Lakshmi,

    I do so for clarity, not to withhold information. I find it obscures the chart otherwise.

    Do a search on my site for “3/10 Oscillator” for detailed explanations, but in essence, it’s the standard MACD with the customized settings 3, 10, 16, meaning it’s the difference in a 3 and 10 period EMA which is then smoothed by 16 periods (for the red line).

  3. max2205 Says:

    now that’s a trend play, as you call it

    Thanks. 40 bounce? Or 50?

  4. Lakshmi Says:

    Thanks for the reply. I bet many people who are looking at your blog for the first time will never be able to figure out that it is the indicator you are using in all your charts. Damn, I have been reading your blog for at least a month now. Or may be I don’t pay attention.

  5. david Says:

    I think this and the dollar are moving in tandem now, the dollar is getting a little toppy although EW analysis says there may be one more push upwards.

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