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


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

Let's examine the daily chart.

Quoting our last oil update:

[T]he July rally in gold took place along with a rally in crude oil. Both commodities declined after oil reached its new local top. From this point of view we can conclude that the corrective move in light crude triggered another move lower in gold.

On the above chart, we clearly see that the price action was similar to what happened last week. However, this time light crude hit its bottom a bit earlier; when we saw a downward move in oil, gold was still rising. Nevertheless, after the yellow metal reached its highest level during Wednesday's session, light crude accelerated its declines.

As you see on the daily chart, this positive correlation between both commodities continued in the following days. Taking the above into account, I think it's worth taking a closer look at the medium-term outlook for gold.

Let's turn to the weekly chart of the yellow metal.

On the above chart, we see that gold continued its rally in the prevoius week and reached a strong resistance zone based on three important levels. The first level is June's top; the second one is April's bottom (in terms of weekly closes); and the third one is the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline.

At this point, it's also worth mentioning the declining resistance line based on the October 2012 and February highs, which strengthens the above-mentioned area at the moment.

Connecting the dots, the medium-term situation seems quite bearish. Yes, there was a small breakout above a strong resistance zone, but from this point of view it was not confirmed. Additionally, the last week's candlestick is a bearish gravestone doji.

In our last oil update, we wrote that there are periods when the relationship between crude oil and gold works. The recent positive correlation seems to confirm this theory. Taking this into account and combining it with the current situation in gold, the next big question is, will this short-term link change?

Please note that the medium-term and the short-term outlook for crude oil is still bullish, while the medium-term and short-term picture for gold is more bearish than bullish. From this point of view, it seems that the acceleration of the downtrend in gold is still ahead of us. However, even if gold leads oil down, the uptrend in crude oil will be not threatened as long as the current correction remains smaller or similar to the previous corrective moves.

For the full version of this essay and more, visit Sunshine Profits' website.

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 where she publishes her articles on gold and crude oil trading.

Twitter: @SunshineProfits
No positions in stocks mentioned.
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