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Oil Update: No Breakout So Far, but the Trend Remains in Place

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Plus, what is the relationship between gold and oil in the near future?

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Now let's check the short-term outlook.



In this daily chart, we see that the situation hasn't changed much in recent days. Although light crude climbed and reached its highest level since May 2011, this improvement didn't last long and the price slipped below the March 2012 and the July highs once again. In this way, the breakout above these peaks was invalidated.

Despite this downward move, the correction is still shallow at the moment and much smaller than the previous ones. From this point of view, the short-term situation is bullish.

Additionally, when we factor in the Fibonacci price retracements, we clearly see that the correction is quite small because it hasn't even reached the 38.2% level. In my opinion, this is a bullish factor.

Where are the nearest support levels? The first one is the 23.6% Fibonacci retracement level, based on the entire April-August rally (slightly above $106). The second one is a support zone (between $102.22 and $103.50), based on the bottom of the previous corrective move (the August 21 low) and the August low. As you see, there is also the 38.2% Fibonacci retracement level, which reinforces this support zone. The third one is the upper line of the rising wedge (currently close to $102).

Summing up, although there was an invalidation of the breakout above the July top and the March 2012 top, technically, the short-term outlook for light crude is still bullish. The uptrend is not threatened at the moment because the recent decline is still shallow and smaller than the previous ones.

If you want to be an effective and profitable investor, you should look at the situation from different perspectives and make sure that the actions that you are about to take are really justified. That's why you should pay attention to the oil stocks index even if you only trade crude oil. In today's oil update, we examine the NYSEARCA Oil Index (INDEXNYSEGIS:XOI) to find out what the current outlook for the oil sector is.

Let's start with the long-term chart.



Looking at the above long-term chart, we can see that the situation hasn't changed and the oil index remains quite close to the May 2011 top.

As we wrote in our previous oil update:

[T]he NYSEARCA Oil Index still remains above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn't been invalidated. Additionally, the oil index is still in the rising trend channel.

Taking the aforementioned information into account, the situation is still bullish.

What about the relationship between light crude and the oil stocks? When we take a look at the above chart (and also at the chart below) and compare the price action in both, it seems that oil stocks were weaker in August, because they didn't reach a new local top. However, it's worth noting that the XOI climbed above the 2011 top in May and light crude didn't make it, in spite of the recent attempt.
No positions in stocks mentioned.
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