Sunday, October 3, 2010

Oil May Retest Its May High

As Tom McClellan has demonstrated in his work on Liquidity Waves, the price of gold leads the price of oil. The chart below shows that over the past two years highs in gold preceded highs in oil. This does not mean that new highs in oil must follow, but as can be seen below by the current purple bar, the upward correction in oil has more time to run in October. If the August high is exceeded, then in all likelihood oil will retest the May high around $87 before another pullback or decline begins. If oil is able to push back up to the May high, then a clear trading range will have been confirmed with oil trading between the May high and the May low.

The recent new high in gold points to another rally after the current one is complete. My hunch is that oil may be developing an ascending triangle that could take several more months to complete. This is long term bullish for oil (and stocks) as it would negate the bearish pattern and increase the probability that oil will rally to new highs next year with a measured move target of at least $121.60.

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