After several days of relative hesitation, oil did finally moved through and closed below an important support level, making our position immediately profitable. Can the bulls however mount a strong enough response to invalidate the breakdown? So far, it doesn't seem very convincing...
Let's take a closer look at the monthly chart below (charts courtesy of www.stockcharts.com and www.stooq.com).
In yesterday's analysis, we wrote the following:
Crude oil just rallied this month and then reversed its course. As of yesterday's closing price, it was up by $0.81 in September. However, today's overnight decline took crude oil over 50 cents lower, which means that the small monthly gain has been almost entirely erased. Moreover, this creates a bearish reversal, which suggests lower crude oil values in the following months.
Let's not forget what caused crude oil to rally recently - it was an attack on the Saudi oil field. In other words, it was a geopolitical event, and such events usually have only temporary effect on prices.
As crude oil declined after we posted the above (and made our new short position immediately profitable), the earlier small monthly gain instantly turned into an almost 2% monthly decline. The reversal became even more apparent, and thus important.
Black gold moved a bit higher earlier today, but it's a perfectly natural course of action. Crude oil just broke below two important support levels - the rising support line based on the August and September lows and below the 61.8 % Fibonacci retracement level.
Breakdowns and breakouts tend to be followed by verifications. It's a situation, in which the price moves back to the broken line or level to "check" if this move was just accidental. In practice, this means that some traders are betting on breakouts or (in this case) breakdown's invalidation as the latter tend to be immediately followed by strong moves in the opposite direction.
Now, until crude oil overcomes again the above-mentioned combination of resistance levels, the outlook will remain bearish. The monthly reversal strongly suggests that the breakdown will be confirmed and thereupon continued. In other words, our yesterday's comments on crude oil remain up-to-date and the profitable short position remains justified from the risk-reward point of view.
From Our Readers' Mailbag
Finally, we received a request to comment on the natural gas prices, so we will do so right away.
We have two things to say about the natgas.
One thing is that this market is not easy to analyze using the techniques that we've developed for the precious metals, crude oil, and currency markets. It's trading in a rather chaotic way with very much varying volatility. There are times, when there are very short-term and calm trends that make the price appear predictable (for instance in 2004), but then there are periods where the price shoots up or down profoundly. There are little common features to help identifying what type of market we have right now and there are little to no signs preceding a market character change. The huge upswings and downswings are not very similar, so one can't even base the size of the move while looking at other moves.
We don't want to say that we don't like the natgas as a commodity. However, we do want to say that we don't like it from the analytical point of view. Not because the outlook is bearish (which most likely is the case, by the way), but because there are very few techniques that appear to be consistently useful.
The second thing that we have to say about this market is that even though it is relatively unpredictable, we can still say something about the outlook. For the past several years, we've been seeing lower highs and lower lows (the trendlines based on them don't work, though). This means that the market is in a downtrend. The only interesting and somewhat reliable thing on this market is the cyclical tendency of natgas to form tops about every 3 years. We marked these cycles with red. Each of the past 6 cases were followed by big declines. The thing is that we saw this kind of cyclical turnaround recently and the price has been declining since that time. Based on the size of the declines that followed similar tops, it appears that we're going to see much lower natgas values in the following weeks.
Still, these are only two techniques that point to the same outcome and that's not much. We can't say that the probability of the decline is very high, but we view it as higher than 50% (about 60% or so). We are much more convinced about the upcoming slide in the precious metals market than we are about the decline in the natural gas prices.
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Thank you.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Effective Investments through Diligence and Care
