Thursday, February 24, 2011

The Logic Of Oil

This is an edited copy of an email I sent to a friend this morning.

What do the charts say about the rally in oil?

If oil closes below the 2/3/11 low of $92.85, then the rally is over regardless of any fundamental argument to the contrary.

If oil sustains above $100.05, the January 2008 high, then it will likely continue higher.

Major resistance is at $120.75, the July 2008 low.

Only if $120.75 is broken to the upside and sustained, can we expect to retest the 2008 highs.

If the Dollar breaks its February low, then gold will likely make a new high.  If gold makes a new high, then the top in oil will be at least 13 weeks later.  Thus, if gold makes a new high, and oil hits $120 well before 13 weeks, then watch out because oil will hit $150.

From the equivalent point in 2008 to the 2008 high took 22 weeks.  Thus, if we are to see a retest of 
the 2008 highs, it will probably take at least that long, or in other words, a top in July 2011+/-.

I would expect such a high to coincide with a pullback low in the stock market at that time, so that would likely
be a buying opportunity in stocks, should it occur.

At the moment, it looks like we will see a correction low in stocks in mid-March followed by another move to new rally highs in May.

If oil continues higher this summer, expect stocks to correct this summer and possibly into the fall.  Afterward, the rally in stocks will continue for at least another year.

Boy that's a lot of ifs.

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