We last looked at crude oil on February 25, 2012, when it was breaking out from an 8 month base or head and shoulders bottoming pattern. Crude oil looked to be headed at least 10% higher based upon price projections. While crude oil's effect on the equity market was the big concern at the time, crude oil just fizzled right after the breakout. In other words, all the worry wasn't worth the attention, and as of today (or a month later) crude oil is trading right back to its break out point.
Blah!
But that's ok. Nothing has changed, and despite the setback, the fundamentals for crude oil (as I see them) have actually improved. When I first turned bullish on crude oil (see November 30, 2011 article), I had a technical model give a buy signal, and I stated that we were in search of a fundamental story to go along with strength in the technical model. I offered several scenarios with geopolitical tensions, monetary debasement, and supply disruptions/ constraints being the most plausible. From my reading, demand was not an issue and was unlikely to be a factor in crude's push higher. All scenarios remain with us today and if anything, there has been little change. What has changed and what I believe to be crude oil positive are interest rate pressures. Since our initial "call" back in November , 2011, interest rate pressures have increased, and this is very much crude oil positive. The only exception would be the crash in crude oil in late 2008 following its earlier near parabolic run up. With this as context, our crude oil model remains positive.
So I view today's pullback to support as a buying opportunity. Figure 1 is a daily chart of the i-Path Goldman Sachs Crude ETN (symbol: OIL). The red and black dots are key pivot points, which are the best areas of support (buying) and resistance (selling). The head and shoulders bottom is appreciated, and the breakout point is labeled (green up arrow). Price has traded back to support levels (or the breakout point and area of old resistance). This support zone is from 25.45 to 26.10. With a stop loss below this support, this should be a low risk entry especially since the fundamentals for crude oil remain strong.
Figure 1. OIL/daily
LargerImage
