Sunday, January 30, 2011

Oil Grinds Higher

Oil's imminent demise has been predicted on a regular basis since late 2009 by any number of elliott wave practitioners and other prognosticators.  However, the fact is that oil is an intermediate uptrend.  It is easy to see that the trend is up using the Darvas Boxes that I have drawn.  The boxes are based on the weekly chart, but the chart is a daily chart.  Since the rally in oil began in January 2009, only one box had a lower bottom than a previous box.  That box was labeled as a bear trap on a post at the time it occurred, and that has proven to be correct.  After rising out of the bear trap, oil then found support at the 2006 high (red line) and now at the 2008 low (cyan line) around 86.20.  Having found support at these levels, if oil can break out to new highs, the next objective around 96 is a high probability target, and the following objective around 107 is also probable.  Whether the final target at 118 to 122 will be seen remains to be determined, but the possibility should not be discounted.

It is unfortunate that stock traders attempting to profit from the uptrend in oil don't have better vehicles for doing so as the USO and OIL have lagged considerably due to futures contango.  Stock traders may do better using oil industry related stocks, hedging with options, or trading the futures directly if able to do so.  A move to 122 from current levels equates to a gain of $32,500 per futures contract, or $16,250 for the mini oil contract.

Tom McClellan has shown fairly conclusively that oil lags gold by about 10 to 15 weeks.  Even if the December high in gold turns out to be an important top, the top in oil may not occur until the first of March to the end of April.

The rally in oil is clearly not impulsive, but that doesn't mean that the next move will be a retest of the 2009 lows as the upward correction can continue in more complex forms.

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