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Oil Likely Bottomed

I thought you might find the chart above interesting. This is the chart of West Texas Crude and it clearly shows that it has broken out of its downtrend of recent months.

You will see the big blue downward sloping line I've drawn on the chart and notice that as we hit 2009, the price broke out above the line and is now touching against the first level of resistance. The price opened today at the resistance level and has pulled back a bit on some profit taking by oil traders.

The breakout is confirmed by the Moving Average Convergence Divergence indicator I follow. You will see the blue oval in the middle chart that is circling the move of the black line as it pulls away to the upside from the blue line.

You will note that I've drawn a blue arrow that is pointing toward the green downward sloping but wavey line. The important thing to note here is that it has curled upward an is set to cross the 50-day moving average. The green line is the upper indicator for the Bolinger Bands – it represents a combination of volatility and relative price levels over a 20-day period. As the upper green band moves higher, you can generally anticipate that the price for West Texas Crude will move higher in coming trading sessions. It is important that it is crossing the 50-day moving average and that gives you an intermediate-term target price for oil around $53.

You can also see the huge move in the Commodity Channel Index that is signaling an end to the bear market within the big blue oval I've drawn on the bottom graph.

The most likely scenario is that oil will pull back a bit, maybe down toward the former restance line (which now is a support line). That will give you a good buying opportunity for oil stocks and ETF's (like USO) to ride the price up to the intermediate-term target of $53. So, if it trades down to the $43 level, you outght to be able to buy the USO ETF and make a +20% profit on that trade.

The combination of oil breaking its downtrend and, as we saw in yesterday's graph, the timing indicator showing that the stock market is likely a buy now, we should have a positive (although volatile and frustrating) first six-months of 2009.

Mark