Crude oil is still in a downtrend, which means investors and traders need to WAIT for a buy trigger, normally the break of a recent high or a significant resistance area ($50), before scaling into a position. I emphasize scaling in because it will take much time for crude oil to formulate a bottom, which I expect will form a very volatile double or even triple bottom pattern, i.e. a protracted bottom formation punctuated with very sharp short-covering rallies. We could see crude oil spike higher to $80 and decline back to below $50 over the next 12 months as the below graph illustrates. What this anticipated scenario means is that there is TIME for investors to buy into crude oil positions as the base building confirmation takes place, as any strong rallies will likely be followed by tests and probable breaks of the previous low so as to enable the creation of the overall saucer shaped double bottom pattern.
However the long-term trend for crude oil remains higher, when I mean long-term I am looking at well beyond the next 12 months towards 5 to 10 years, when I would not be surprised given the peak oil fundamentals that we will actually be visiting the $200 crude targets that were loudly pronounced during mid 2008 as being imminent when crude oil was trading at $147. This scene should not be surprising given that the US Dollar bull market remains intact. That will continue to bear down on all commodities during 2009, but more on the dollar in my next (fourth) US Dollar bull market update.
Trend Analysis
Trend Analysis - Crude oil is clearly in the overshooting to the downside phase, having plunged through the original target of $80, overshot support at $60, with the final break of the low of $50, and it's now assaulting the $40 support level. Further immediate support exists along decades old resistance areas generated during the 1980's in the region of $35. Therefore, this suggests further crude oil downside is limited. However, the deep retracement suggests a wide trading band between $80 and $35, which raises expectations of much price volatility during the base building process in 2009.
As a result, those now calling on crude oil to head towards $20 are reminiscent of calls for crude oil to hit $200 earlier this year. The overshoot that was going to occur has occurred with the expectations that there is little further downside remaining in future price action. However a bottom has to be formed that will take time to occur.
Oil Price December 09, 2008
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