Oil, Oil, Oil. Pullbacks Lead to Higher Prices

Jul 3, 2008: 9:09 AM CST

Crude Oil has been, and is currently, the focus of an extraordinary amount of coverage in the media, and is a dominant topic at the watercoolers and at home.  Ask anyone you see and odds are they have a strong opinion about high crude oil (or gasoline) prices – and it’s probably strongly negative.

This year has been quite exceptional for the crucial commodity – only 8 weeks have shown negative prices, and if you count since February 2008, the commodity has only seen 5 down (negative) weeks.  That is remarkable for any stock or commodity, given that roughly 25 weeks have transpired so far in 2008.

On the daily chart, any pullback (retracement) – which has usually resembled some sort of flag continuation pattern, has led to the expected ‘measured move’ price objective.  Let’s look at the powerful positive price action in Crude Oil this year so far.

I highlighted the late March ‘flag’ pattern which had a measured move price projection to around $125, and I remember taking ‘heat’ for that projection (Price will never go that far!) and even feeling slightly silly for making that projection, but indeed that’s what happened.

Price retraced in late May only to complete yet another measured move flag style pattern.

At the end of May, price created a more powerful (and more pronounced) bear flag which met its price objective violently and rapidly two days later (when oil had a record two-day price move).

Price consolidated through most of June,  but has now broken a rectangle consolidation (or flat-line bear flag) which has a potential price objective (measured move) of roughly $150 (the measured move is estimated and simplified to be $15).  That’s currently $6 away (of course there’s no way to know for sure whether it will achieve that target).

Higher gasoline prices are causing consumers and businesses to cut back on purchases and trips they otherwise would have taken, which means there’s less money flowing in the economy, which – obviously – puts a drag on the broader US and Global Stock Market Indexes.

One would think that with all this media attention and virtual ‘one-sided’ bullishness on the price of oil, that the contrarian mentality would prevail and prices would at least come off a little, but there’s so much going on from a supply/demand (fundamental) and ‘price discovery’ or speculation/trader driven moves (including momentum players) that it could be very difficult to turn this trend easily.

And so we continue to watch the struggle unfold – and realize the effects and possible opportunities within this environment for our trading and investment accounts.

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