Friday, June 6, 2008

Parabolic spike

The current sentiment seems to be that oil is a sure thing. Yesterday we saw oil surge almost $6. That was the largest one day rise in history if I'm not mistaken. If we look at a long term weekly chart it's easy to see the parabolic nature of this current rally. At the peak a couple of weeks ago oil was stretched 46% above the 50 WMA that has acted as support during the first phase of the bull. This is by far the most oil has risen above the mean during the entire bull market. We are starting to hear way to many calls for $200 oil.

Don't get me wrong I'm still a commodity bull but I'll be the first to admit that parabolic spikes don't end well. The effect of this spike has been to put the economy into a recession. Recessions cause demand to fall. Falling demand equals lower prices. I'll also note that this is an election year and everyone is screaming at the politicians to do something about oil prices. I have no doubt that the powers that be will do something. Whether it be raising margin limits or reweighting indexes, etc. This is going to end just like all parabolic spikes end, in a swift collapse. This is not a place where I want to chase oil stocks.

When this pulls back to the average then oil will be a strong buy again for the next leg up in the second phase of the bull. Of course at that point everyone will be telling you that oil was in a bubble and it has popped. Nothing will be further from the truth.