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Oil’s Slippery Sloap

oil-descending-wedge-2009-12-08

We have a classic pattern in oil developing. This pattern, which looks like a flag is a typical consolidation pattern that happens after a big up move in price. You can see the big move from the September lows to the October highs, followed by a range bound price pattern drifting lower.

Statistically, 79% of the time the price will break out of the range in the direction of the previous move, or a move up in our case, to test the high prior to the formation of the flag.

These sorts of patterns generally work because they represent the sentiment in the market, which the graph allows us to see. In our case, the big push up beginning in September coincided with the feelings among investors that the economy was set to strengthen. Investors enthusiastically began to push economically sensitive investments higher. After such a big move (it was 30% over the course of a few weeks), the buyers get exhausted and some begin to take profits. However, there is continued interest in the investment and buyers materialize to push the price back to the top of the range.

This sort of give and take continues for a few weeks as the euphoria wears off. Then, you usually get some actual news confirming the original investor enthusiasm, which leads to the breakout (79% of the time). But, of course, not always.

Right now, oil is being negatively impacted by a rallying dollar as investors think that the Fed will have to raise interest rates sooner rather than later. The dollar is a powerful force in the market and could very easily overwhelm the other factors impacting the price of oil.

We will continue to watch this pattern play out, but will stay with the odds for now. If we see a serious breakdown of the pattern and a downward beak happens (as it does 21% of the time) we will be lessening up on our energy positions.

Since today is the anniversary of John Lennon’s assassination I thought we’d check out one of his final songs released a few weeks before his murder – this video includes a retrospective of his life which seems appropriate today.

I recall that I was in the campus radio station that night helping out one of my fraternity brothers with his radio show when the news hit the wire. Strange and sad night.

Mark