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.