Friday, July 18, 2008

Crude oil Conundrum

Crude oil prices declined nearly $19 in the past three days. I wrote in many previous posts that a top in energy and precious metals was nearing. I think traders would have sold when markets closed below the important support of $135.14. I mentioned earlier that USD is also nearing an end to its downfall. That it is time to be cautious and not bullish in gold. That the whole dynamics of different markets can change as most markets stand at the brink of getting into a trending zone.

Crude oil prices have completed an ending diagonal pattern. An ending diagonal pattern suggest the end of an important uptrend and this could well be an important top for crude oil. Prices may decline to $102 before making any new top. Lets have a look at the long term price pattern and the market structure:

The crude oil price rise has been parabolic and there is a probability that if crude oil breaks the $122 mark the market will fall like a stone. When a parabolic market breaks it usually retraces the complete run up. The current prices retracement can stretch to $102 in the near term on a daily closing below $120.

The price dynamics of crude oil in the long term remains very strong. Crude oil remains in the long term bull market and it would continue to do so over a decade of so. The current decline would be a sort of correction in the larger trend. There are several pivot points in the crude price moves.

The Elliott wave structure of the current prices moves shows that we were in the 3rd wave of the primary bull trend and may have ended the third wave at $148 and begun the corrective fourth wave. The wave of one lesser degree was the 5th wave which ended in an ending diagonal triangle pattern and is now unfolding into an expected zig zag pattern. It is easier to look at it and understand.

The crucial pivot points in the structure of the wave stands at $126, $122. A break below these levels well confirm a fall towards $100 or lower. I feel the crude oil market has formed a top just $7 ahead of my expected top at $155. At least this is what the prices are telling me when they formed an ending diagonal with a double top and two evening star patterns at the top.

Crude oil prices may rebound to $135 levels after touching $126 or so. This would form the 'B' wave of the corrective ABC correction. A near term target now stands at $122 on a retest of $135 with a risk level of $139.

The fundamentals for crude oil has not changed overnight. As I mentioned in my previous post ( that there has been a demand destruction of nearly 2 million barrels a day and a supply rise of a million barrel or so, the market has weakened accordingly. Important point to note is that if crude surprise above $139 from here then it would again get into a zone from which it can make new highs. Previously it had formed a double top formation at $120. The current market top looks more promising and a few investment banks have come up with confirmed articles that Mexico is hedging their produce by selling short in the future markets.

Crude oil is now witnessing a lot of overhead supply and once it breaks the $125-126 range there would be a huge pressure of long liquidation which will increase the steepness of the fall. On the contrary we should be cautious for any price reversal that may arise.

Sahil Kapoor

No comments:

Post a Comment