Tuesday, July 22, 2008

Has oil topped?

Despite yesterdays weak rally I do think oil has topped. Every single time oil has spiked more than 100% with in a year it has led to a recession. I think it's safe to say that this time has been no different. Oil actually rose almost 200% trough to peak.

Now let me say that every recession has crushed demand and eventually brought prices back down. It will be no different this time. This time we have a global recession and it's going to be severe. To think that somehow demand is going to increase or even stay the same in a severe worldwide recession is simply absurd.

Often after a long intermediate move the first counter day after at least 4 days in a row in the direction of the trend will signal a trend change. (The four day corollary).

Also after a long intermediate move four days in a row counter to the trend will often confirm the trend change (The four day rule).

You will notice that we have both on the oil chart. Oil is short term oversold so a bounce could be expected but the odds are now in favor of oil trending down.

Looking at the weekly chart it becomes apparent just how far the parabolic rally went and how overbought it became. I really don't think this is going to be corrected by four down days. I fully expect oil to correct back to the consolidation zone of the T1 pattern (the technical rules are at listed on the lower right side of the home page). That should take oil back to the $85-$100 level before this correction is over.

Investors looking to hide from the bear in the energy sector are going to be disappointed I'm afraid.