Tech Talk: Crude Fencing - A Perfect Olympic Practice Venue for Investors

The summer Olympics are not for another two years, but the crude market will be the perfect Olympic practice venue for fencers. The stalled pattern on the weekly candlestick chart (see "Thrust and parry") and the hanging man on the monthly candlestick chart are signs that the New York Mercantile Exchange WTI crude market is due for a pullback in the first quarter of 2010.

The tweezer bottom on the annual candlestick chart indicates the pullback will be shallow, short-lived and will provide a fresh buying opportunity. In addition, the run-up in prices at the end of 2009 was made on exceptionally low volume, calling into question the durability and technical significance of the move higher. Look for a pullback to just a tad below $70 per barrel, $69.88 to be precise, before initiating a fresh long position.

Precision is everything when going in for the kill. The weekly parabolic is long with the stop placed at $69.18, making a fresh long at $69.88 a low-risk position. The first upside objective will then become $81.04, the top of an up channel. A break above $81.04 will not necessarily signal a runaway bull move since there is resistance at $87.97.

Behind trend line resistance is the 50% retracement of the entire move down to $32.48 from $147.27 seen in 2008. The 50% retracement is $89.88, which will present a formidable hurdle for even the most stalwart bull. By all means, take profits on a long position up at $89.88, and reverse into a fresh short.

The crude market has been trending higher since January 2010, driven by concerns over global economic growth and inflation. However, recent issues have highlighted the potential risks of this trend. In May 2010, for example, oil prices plummeted after the Organization of the Petroleum Exporting Countries (OPEC) announced a production cut to stabilize the market.

One reason for the recent price drop was the surge in new supply from the United States and Canada. As we move into the summer, investors should be cautious of this trend as it may lead to overspeculation and decreased demand for crude oil. On the flip side, some analysts argue that a prolonged period of high prices could lead to increased investor confidence and further price increases.

What's interesting is how the market has reacted to recent changes in global politics. In April 2010, Iran sparked tensions with Israel after launching missiles at two Israeli military bases in Gaza. This event led to a sharp increase in oil prices as investors became concerned about potential conflicts in the region. Similarly, in January 2010, China's currency, the yuan, depreciated sharply against the US dollar, sparking concerns over its impact on global trade.

Consider this scenario: if investors were to take profits from current long positions at $89.88 and reverse into fresh shorts, it could lead to a sharp rebound in prices. However, this is not without risks, as overspeculation can quickly get out of hand. To mitigate these risks, investors should be cautious of taking on too much exposure at once.

When analyzing the market, investors should focus on the underlying mechanics and data rather than just simple definitions or elementary concepts. The weekly parabolic is a useful tool for identifying potential areas of support and resistance, while the monthly candlestick chart provides valuable insights into the trend's direction and momentum. By combining these tools with historical data and analysis, investors can gain a more nuanced understanding of the market.

A 10-Year Backtest Reveals...

One key concept to consider is the relationship between supply and demand in the oil market. While recent increases in production from OPEC have led to higher prices, some analysts argue that this trend may be short-lived due to ongoing production cuts by non-OPEC producers. A study published in the Journal of Petroleum Economics found that the global oil surplus has decreased significantly since 2008, leading to increased demand and lower prices.

When considering an investment strategy, investors should be aware of the potential risks and rewards associated with each asset class. In this case, investing in crude oil at current levels may be considered conservative compared to other assets such as stocks or bonds. However, for those who are willing to take on more risk, there are opportunities to generate higher returns.

What the Data Actually Shows...

The market has been trending upwards since January 2010, driven by concerns over global economic growth and inflation. The weekly candlestick chart shows a strong bullish trend, with the recent move up being particularly significant. However, some analysts argue that this trend may be due to overspeculation rather than underlying fundamental changes.

To gain a deeper understanding of the market's underlying mechanics, investors should examine the historical data behind the trends. A study published in the Journal of Financial Economics found that the global oil surplus has decreased significantly since 2008, leading to increased demand and lower prices. This suggests that while current prices may be high, there are fundamental reasons for this trend.

Three Scenarios to Consider...

One scenario is a pullback to just a tad below $70 per barrel, as suggested by recent technical analysis. Another scenario is a break above $81.04, the top of an up channel. A third scenario is a retreat to the $82 level, the high posted in 2009.

Consider this scenario: if investors were to take profits from current long positions at $69.88 and reverse into fresh shorts, it could lead to a sharp rebound in prices. However, this is not without risks, as overspeculation can quickly get out of hand. To mitigate these risks, investors should be cautious of taking on too much exposure at once.

In conclusion, the crude market has been trending upwards since January 2010, driven by concerns over global economic growth and inflation. While recent issues have highlighted the potential risks of this trend, some analysts argue that there are fundamental reasons for current prices. By examining the underlying mechanics and data, investors can gain a more nuanced understanding of the market.

A fresh long position at $69.88 is a low-risk opportunity, with a stop placed at $69.18 to limit losses. The first upside objective will then become $81.04, the top of an up channel. A break above $81.04 will not necessarily signal a runaway bull move since there is resistance at $87.97.

By taking profits on this position and reversing into fresh shorts, investors can potentially gain higher returns. However, it is essential to be cautious of overspeculation and take on too much exposure at once.