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Oil Breaks Out Above Resistance

oil-bear-mkt-view4

Doing my normal Sunday afternoon review of the markets and noticed that Friday was a breakout day for oil.

You might remember this chart from several days ago when I noted that oil was bumping up against the 38.2% retracement level and that it was acting as resistance to further up moves, but that the chart kept making higher lows in an uptrending direction.

Friday, we had the break through resistance. Will it continue up from here? Remember my rule: for a breakout to hold you have to close above prior resistance for three trading sessions or you need to close above resistance by 3%. We could easily see a move below the resistance line again, but that would be OK as long as we have a higher low along that uptrend line and move back above resistance in due course.

Assuming all of that happens, where could oil be headed?

From a fundamental standpoint, for new production to be profitable, the break even point is $70. So, there is a market need for oil to remain above $70. However, above $80, it puts a constraint on growth in our economy as energy costs exceed 4% of GDP. This is the classic push-me-pull-you and will likely represent the core of the trading range until the economy is well into recovery.

However, from a technical standpoint (technical meaning the price action that represents the psychological aspect of the traders in the market) we have the 50% retracement level or $91 per barrel. However, I’ve drawn a circle around a mid-day high point from last October around $85. That will likely act as interim resistance before we get to $91 – if we do. Demand is still weak, even though low levels of gasoline inventories surprised the market this week causing the push above resistance.

So, I still believe the trading range is between $70 and $80, but expect that we could certainly see a technical spike up which would probably resolve to the downside and move back to the primary trading range until economic conditions dictate increased demand (or we hit the point where Mexico transitions to an oil importer from an oil exporter – which is predicted to occur within the next year or so – and we have reduced supply).

Never a dull moment!

Mark