6-way look at whether oil can sustain its rally from here

Speculating on oil's rally has gained more attention this week, specifically whether it can continue on up to higher Fibonacci retrace levels around $90, also pointed toward on standard P&F charts around $87 (and now with Goldman Sachs echoing that with a target of $85). Tony Caldaro's remark about oil in his weekend update indicates he's seeing resistance around $70, plus I've been concerned based on concerns from the Fibonacci levels and my monthly chart. So here's a review. I already showed the P&F daily chart pointing to $87 about a week ago, so below I'm showing the standard weekly and monthly charts for oil ($WTIC). I'll also discuss oil from five other analysis perspectives, below. First, just a quick note - it's above its declining 200-day moving average, but its 50-day moving average is only now curling up toward the 200, meaning that it hasn't yet achieved the bullish cross upward that would really help confirm a bullish uptrend. I suggested recently that tightening stops would be a good idea, and on Wednesday it looks like a lot of people felt the same as there was increased volume as oil moved under its prior-day low. Thursday it poked a new rally high, and Friday it looked indecisive. What to do?

Looking at the 6 views I'm using for this post, it's quite reasonable to expect a pullback soon (maybe not immediate but soon) as oil deals with resistance. Positioning for a pullback accomplishes several things. One, to lock in profits from the rally. Two, to be positioned correctly, especially if a pullback deteriorates into something worse. If the dollar strengthens or even moves into a rally of its own, that could become more bearish for oil than many currently expect.

The monthly P&F chart (at right) shows the same $87 bullish price objective as the daily, and the weekly P&F shows an even more bullish $127. However, both the weekly and monthly show an "alert" described as Long Tail Up on June 1. This is an early warning that crude may experience weakness near-term; it doesn't necessarily signal that oil fails and goes to new lows. The daily P&F indicates support about $51-$52 in $WTIC.

Apparently Goldman's analysis is that oil will move sharply up toward that $87 level, with no real pullback. If that's right, it will be a very interesting chart pattern. Either they are thinking it's the initial wave of some type of third or fifth wave (thus assuming that the all-time high was only a first or third wave), or that it will be a very vicious B wave up. My sense is that the all-time high was more likely a 5th wave and therefore a B wave up is more likely - in which case it will count out as a three-wave movement that does have a tradable pullback. (Or maybe it was a B wave of its own and this is a C wave that may not have completed yet, with this being (part of) its 4th wave.) We'll also take a look at Tony Caldaro's Objective Elliott Wave count, but first a quick look again at my monthly chart. You may remember, the one that shows oil broke under a big channel trendline. There's also moving average and Fibonacci level resistance that it's beginning to encounter on the bigger-picture charts. Maybe it can get above those and make them support, but if it stalls out then those moving averages will keep dropping down. And there may well be traders looking to see whether oil turns back down again from that broken trendline:


My daily charts showed that oil recently achieved both symmetry objectives and a first test of Fibonacci retracement by $WTIC. I won't post those daily charts of mine again, as I've posted them quite a bit recently (use the "Oil" label in the labels list to find prior posts). Here are Tony Caldaro's daily and weekly charts of oil ($WTIC)(available from his public charts at his charts link at Elliott Wave Lives On). While the indicators have been strong, they are starting to diverge, and there is chart price resistance at $70. Tony's OEW count labeling indicates that he's looking for a wave "b" to complete at some point, that would be followed by a "c" wave down that would test the lows which he marked as wave "a":


Looks like the commercial traders have stepped up their skepticism. The COT chart data available at COT (Commitments of Traders) shows they slightly increased their relatively sizable net short position, even as small and large speculators remained bullish:


The folks at "Chart of the Day" decided to step into the issue with their weekly free chart and commentary. Once again they've used inflation-adjusted data - they sure like to do that! - but bottom line, they're sounding skeptical too:

Chart of the Day
The decline in crude oil prices that began in mid-2008 was historic – plunging over $90 per barrel in just eight months. Over the past four months, however, crude oil prices have spiked up nearly $30 per barrel. Today’s chart provides some perspective on the historic decline and recent spike with a long-term view of inflation-adjusted West Texas Intermediate Crude. Today's chart illustrates that most oil price spikes were a result of Middle East crises and often preceded or coincided with a US recession. It is also interesting to note that the recent spike in oil prices has brought the price of oil back to a relatively high level – a level that was surpassed only during the major price spikes of 1979-1982 and 2005-2008.

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Might oil just climb a wall of worry, even if that worry is experienced more by commercial traders rather than the bullish small and large speculators? I think it's usually the small and large speculators that provide the worry for that idea. But perhaps sentiment as measured by "max pain" at Option Pain CBOE (Max-Pain) Calculator from OptionPain.com suggests that, near-term, there's more likely a "well of worry" for oil. The next opex Friday isn't for another two weeks, but it's about time to start looking at options "max pain." (But do also remember, a strongly trending market can close beyond the "max pain" level in the direction of its trend, so keep an eye on trend indicators as well over the next two weeks.) June "max pain" is showing at $33 for USO. This widely-traded ETF for oil just closed yesterday at $37.40, and I'm not convinced it finished its little 5th wave on the move of the past few weeks. But if USO does that and falls back about 10%, it could reach $33 and still be above its 50-day moving average. USO's 200-day moving average is still above at $44 - at that point, USO would be squeezed between its moving averages. The way oil behaves on a pullback, and whether it gets support at 50-day moving averages, should clue us in whether the pullback turns into something more bearish.


(click any chart to see it larger)