Crude oil's perilous position shows that it may drop unexpectedly in 2010

Crude oil may surprise, even disappoint, a lot of traders during the upcoming year, 2010. My reference to a perilous position is mainly to the way it looks on my monthly chart, below. Of course it fell off recently with the dollar's bounce, and hasn't been making higher highs. Oil's drop was from its Fibonacci .382 retracement level to its 2008 peak just over $147. Originally I thought the rally would be merely a "B" wave dead-cat bounce, and Tony Caldaro with his Objective Elliott Wave (in sites list at right) was showing that too. Then Tony shifted his wave count to a bullish one, indicated on his $WTIC charts at his public charts list (available at his site). I was good with that into the $82 test it made. But now I'm concerned that its pattern and path aren't bullish. So I'll revisit the "B" wave idea here.

A daily chart of USO is below. It's barely back up to the 50-day moving average (DMA), on volume lighter than the selling volumes that pushed $WTIC down to poke the $70 level. Tony's weekly chart of $WTIC is next, then my monthly chart of $WTIC. Crude oil hasn't managed to decisively break through the monthly chart Bollinger Band midline and near-term moving averages, and the monthly MACD hasn't moved over the zero line. While I don't rule out that it might manage a quick higher retest at the Fibonacci 50% retrace (about $91/92) to the 2008 high, it's already been almost a year since it made its lows. It's taken roughly twice as long as the time it dropped from the high, to retrace 38.2% (and perhaps 50%) of the way back. These metrics fit a "B" wave scenario quite well.

From a fundamental perspective, while there are better sources of info on that, it would seem the supplies are sufficient and that, barring some international turmoil influencing it strongly, there's enough supply to depress prices. That's one of the points made by Phil Davis of Phil's Stock World, in Outlook for a Merry Christmas Eve -- by Phil Davis, at Seeking Alpha, http://seekingalpha.com/article/179779-outlook-for-a-merry-christmas-eve. What are other technical analysts saying about oil? A very quick look turned up Slope Of Hope with Tim Knight: Energy Markets, at http://slopeofhope.com/energy-markets/. He seems to be turning skeptical, although I don't know if his time frame is just short-term. And there's a review from a couple of weeks back, at Decision Point®: Chart Spotlight 12/11/2009, at Energy and Financials Weakest Sectors, by Carl Swenlin on December 11, 2009, at http://www.decisionpoint.com/ChartSpotliteFiles/091211_cspot.html. It's basically pointing out the relative weakness, which can be a precursor toward more bearishness first for oil, later for equities markets generally.

Technically, the key levels are close at hand. Above are $80 and $82, and below is $69, $70. A move by $WTIC outside this range will be important. But a move above $82 won't guarantee it's bullish, unless it lasts longer than a month or so. Once it gets to March, it would get beyond the one-year time frame. And there's a possible four-year cycle at work that could point oil toward a cycle bottom late in 2010 or early in 2011. That's a reason to take a break under $69/70 in $WTIC rather seriously. A "C" wave down, whether it's already started or might start in a month or so after testing a bit higher - would lead crude oil down to retest the mid-$30's again or even lower.

So we're not going to expect oil to follow with gold or even with other commodities, since different factors are likely to start influencing different asset classes differently. True, the US dollar will still be important. But these factors may only influence the actual level of lows to which oil may sink. For now, we'll watch the levels mentioned above and be ready for oil to move down. While I respect Tony Caldaro's decision to move to a bullish count, I believe it would be negated if and when $WTIC moves back under $70 - so we can let that level be the deciding line at this point. If oil indeed disappoints many by going under $70 again, it may trigger a selling wave that produces a bearish "C" wave down. (For Elliott Wavers - an alternate would be a wave 2 IF it remains above the prior lows - but what a gamble! Better to sell it under $70, which might turn out to become one of the best trades of 2010 as we get several months in.)

I've added the Commitments of Traders graph for crude light (CL), from the COT site in the list at right. You can see the commercial traders were right to be quite short into the high at $82, and since then have lightened up. But their short positions still outweigh the net longs of large and small speculators. Not the only reason to be defensive on oil, but it's certainly a factor to remember as we watch our levels.