The Dollar and Oil

Jun 7, 2008: 1:45 PM CST

The headline from last week will be the sudden surge in crude oil prices, but let’s take a moment and view this development along with the implications for the US Dollar Index.

Crude Oil Prices:

This is an excellent example of why it’s best not to try to anticipate market tops or bottoms.  It also strongly reaffirms the basic market principle “Trends Have Greater Odds of Continuation than of Reversing.”  Each time the crude oil prices retraced, they actually became a better buying opportunity, rather than a chance to ‘buck the trend’ and ‘get short.’

Nevertheless, prices pulled back just beneath their rising 20 period moving average, which has happened four times this year since rising above in February – each time provided a good buying opportunity.

The surge Friday may or may not be unsustainable, and a variety of market pundits will argue both sides of the prediction, but the 8% rise in prices was remarkable, nonetheless and helped dominate the news cycles and sent the broader stock market indexes plunging 3% for the day.

Crude Oil prices exhibit a classic example of a strong, powerful uptrend that could be used in any textbook definition of an uptrend.

What does this mean for the US Dollar Index, which looked potentially poised for a recovery?

Dollar bears screamed “not so fast!” this week, staving off what could have been an impressive recovery and daily trend reversal to the upside, which would have been a remarkable development.

If there is to be a reversal, it will come slightly later than it could have arrived without the sharp rise in oil and gold prices this week.

The $73.5 level corresponds with the falling weekly 20 period moving average, if you’re wondering why that zone appears to be a magic level.  That weekly average has provided strong resistance in the past, and did so recently as well.

A bearish potential double-top (short-term) formation occurred, complete with a negative momentum divergence, which could signal a test of the March/April lows or even just beyond, especially if oil continues its ascent.

We’ll keep close tabs on these markets and of course how their interplay affects the broader US Stock Market.

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