Last week, after the Fed said that it would stick to its stimulus plan for now, the yellow metal gained more than 4%, leading the rally in commodities, and it rose to a new one-week high. At the same time, crude oil extended earlier increases and finally gained over 2% on Wednesday.
However, during this euphoric rally, investors overlooked the fact that it was fueled by a weaker economic outlook from the Fed. Therefore, the improvement didn’t last long, and we saw a quick profit-taking during the last two sessions of the week. Gold then gave back almost 60% of the previous sessions’ gains and dropped to $1,325 per ounce on Friday. What’s interesting is that, at the same time, light crude has declined sharply, erased all September’s gains, and reached a new week low.
Taking this information into account, investors are probably wondering which of these commodities they should choose. Which one has a better upside potential in the near term? Can we find any guidance in the charts? Let‘s take a look at the charts below and try to find answers to these questions.
We’ll start with the weekly chart of crude oil (charts courtesy of http://stockcharts.com
On the above weekly chart, we can see that after three unsuccessful attempts to break above the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel, oil bulls lost their power.
Just like the previous week, oil bears noticed the opportunity to go short and triggered another corrective move, which pushed the price of crude oil slightly above the September low. On Monday, we saw further deterioration, and light crude dropped to its lowest level since August 5.
From this point of view, the situation is somewhat mixed. On the one hand, crude oil still remains in the upper part of the rising trend channel, which is a bullish factor. On the other hand, three unsuccessful attempts to break above this level resulted in a decline to a new September‘s low, which doesn’t look so bullish. In spite of these facts, we should keep in mind that the recent decline in light crude is just slightly bigger than the previous ones in the entire April-August rally.
Now that we know the current medium-term outlook for crude oil, let’s take a closer look at the chart below and check the link between crude oil and gold. Will gold lead oil higher?
That’s still not likely. Looking at the above chart, we can see that the connection between light crude and gold has changed in recent days. Although we saw a clear negative divergence earlier this month, both commodities moved pretty much in the same direction in the previous week.
They declined together in the first half of last week and then rebounded on Wednesday after the Fed‘s statement. This improvement didn’t last long anyway; in both cases, we saw a downward move in the following days. At this point, it’s worth mentioning that the recent decline took crude oil to a new week low, but we didn’t see such price action in gold, which means that the yellow metal was stronger in relation to light crude.
although crude oil erased all September’s gains and reached a new month’s low, we should keep in mind that the recent decline in light crude is just slightly bigger than the previous ones in the entire April-August rally and the uptrend is not threatened at the moment. At the same time, the downtrend in gold remains in place. Consequently, at this time -- and taking the short term into account -- it seems that crude oil has greater upside potential than gold does.
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Nadia is a private investor and trader, dealing in stocks, currencies, and commodities. Using her background in technical analysis, she spends countless hours identifying market trends, major support and resistance zones, breakouts, and failures. In her writing, she presents complex ideas with clarity that enables you to easily understand market changes and profit from them. You can read Nadia's analyses at SunshineProfits.com where she publishes her articles on gold and crude oil trading.
No positions in stocks mentioned.