Opportunity or Disaster

By: Sol Palha | Sun, Nov 16, 2008
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"I do not have superior intelligence or faultless looks. I do not captivate a room or run a mile under six minutes. I only succeeded because I was still working after everyone else went to sleep." ~ Greg Evans, Suspense Novelist

Oil

In May 2008 we stated that the oil to Gold ratio was in favour of gold and that it would make more sense to invest in Gold than in oil.

Now it appears that this ratio is once again pointing in favour of gold and once again we would favour silver over gold as we think on a percentage basis the gains here will be far larger than those of Gold. Note that this does not mean that the Gold and Silver markets are going to take off immediately however it does suggest that investing in silver could produce more gains than investing in crude oil. Full Article

Oil was trading around 120 at that time and Gold was trading around 870; oil is now trading at 57 and gold is roughly at 742. Oil has basically lost over 50% of its value in that time and Gold has only shed 130 dollars (14%); granted one would have lost money in both investments, but it is far better to give up 14% then to shed over 50% in the same time period.

Since publishing this article we issued several other statements in regards to the oil market.

Oil also appears to be slowly putting in a top and anything small could now trigger a rather huge correction. Market update July 15, 2008

The 120 price point level should have offered some resistance but it was taken out with ease and now the next target appears to be the 102-105 ranges; if an oil trade below these levels for 12-15 days in a row then the next target is 90 dollars. Given the fact that markets tend to overshoot there is a decent chance that oil could pull back all the way down to its 6 year main up trend line which now falls roughly in the 75-78 ranges. Market update August 12, 2008.

Oil has now pulled to within the ranges of our initial targets and if oil now trades below (102-105) these ranges for the stated 12-15 days, then there is a really good chance of oil trading to 90 dollars or lower. Oil could go on to trade all the way down to its main 6 year up trend line which currently comes in the 63-70 ranges. Market update Sept 9, 2008

So where we do we stand now in terms of oil? To answer that lets pull up a 6 year chart of oil.

Oil broke through all major support points with ease (120 and 90) as result of which an extremely strong correction was virtually guaranteed; both our primary and secondary targets have now been hit. It is currently trading in no man's land and if it closes below 54, tests 51 and does not trade above 54 within 3-6 days, it will almost guarantee a test of 45. Rather than running away from this sector now, traders should be looking for good long term plays and start nibbling. Extreme corrections are not normal occurrences and 9 out of 10 times they usually make for incredible long term buying opportunities; traders now have a chance to buy oil stocks at prices that will one day seem too good to have been true.

The downside risk is now limited in contrast to the upside potential; furthermore oil supplies are actually decreasing, depletion rates are increasing and OPEC as always will over react in terms of cutting down production. Oil companies have also drastically slashed or in some cases completely eliminated their exploration budgets, thus just when they should be spending the most they have decided to completely scale back. Long term this is going to have huge implications. The IEA also seems take a similar view point.

Many companies have slashed capital spending budgets for at least the coming year. Just last week, ConocoPhillips and the state-run Saudi Arabian Oil Co. said they've postponed construction of a multibillion-dollar refinery in Saudi Arabia because of the uncertain economy. Royal Dutch Shell PLC, Europe's largest oil company, said last month it was pushing back a decision on expanding an oil sands project in Canada.

Another huge obstacle for the multinational oil giants like Shell and Exxon Mobil Corp. is gaining access to potential new sources of fossil fuels. State-run oil companies control about 80 percent of global oil reserves and, for now, are keeping a tight grip on their assets.

"Even (in the United States) we're limiting access," said Mary Novak, an energy analyst at IHS Global Insight. "The $20 trillion figure sounds good, but who's going to spend it and where are they going to spend it is the biggest problem." The IEA expects demand for oil to rise from 85 million barrels per day currently to 106 million barrels per day in 2030 -- 10 million barrels per day less than projected last year.

The IEA is a policy adviser to 28 member countries, mostly industrialized oil consumers. China and India continue to be the main drivers, accounting for more than half of incremental energy demand to 2030, but the Middle East, a longtime supplier, also emerges as a major new demand center. The agency said that these trends call for energy supply investment of $26.3 trillion to 2030, or more than $1 trillion a year, but it noted that tight credit conditions could delay spending. Full story

For oil to resume its daily up trend it would need to break past 63 on strong volume and then trade past this point for at least 12 days in a row. Our advice to investors is to use treat the current situation as a long term buying opportunity; current levels of fear are so high that not only are they throwing the baby out with the water; they are in some cases throwing the entire bathroom out also.

Dollar

We published several articles alluding to the fact that a strong rally in the dollar was long over due; two such article are listed below:

Currencies, Feb 07, 2008
The Dollar, Dec 10 2007

We have to however state that the dollars ability to break past 74.40 and its main down trend line with such ease is an extremely bullish development. Market update August 12, 2008.

We stated a few months ago that when the super models and other idiots started demanding that they get paid only in Euros that a top was not to far in the makings.

The 81 price point level is where we have a massive amount of resistance and this can both be seen from the chart above and from the comments we just made. If the dollar is to have any chance of mounting a spectacular rally it will need to trade past 81 for 18 days in a row and if it achieves this it should go on to trade to the 96-99 ranges. Market update, August 26, 2008

The dollar has mounted a rather spectacular rally in the last few weeks and came very close to hitting the 90 price point level; while our ultimate targets are in the 96-99 ranges we do not expect these targets to be hit in one shot. The current rally has taken place at a very rapid pace in a very short period of time and it's only normal to expect some sort of pull back before the dollar trades higher. It could trade as high as 90 before embarking on a correction that should last 2-3 weeks; this pull back could take the dollar as low as 81 but only if 84 is taken out for 6 days in a row. Ultimately the dollar should be able to challenge the 90 price point level and at least trade as high as 93 before resuming its long term downward trend. 96-99 represent our extreme targets and were issued due to the fact that all markets have exhibited a tendency to overshoot their stated targets.

While it would be healthy for the dollar to mount a correction, it does not mean that it will, as the daily, short term and intermediate term trends are all pointing upwards. However if it were to hit its upside targets without mounting a correction, the ensuing correction would be even stronger and it could even result in the dollar resuming its long term down trend at a much faster pace.

While we are bullish on the dollar in the short to intermediate time frames, we are not bullish on the dollar long term.

Gold

Gold's short term trend is down, intermediate term trend neutral to down and long term trend is still up. Its daily trend is also down after it broke through a former zone of strong support (780).

All charts were provided courtesy of www.prophetfinance.com

As the dollar is expected to mount some sort of correction, gold should rally during this phase, but ultimately we expect the dollar to challenge its recent highs and trade at least to the 93 price point level. If Gold is unable to trade past 750 and stay above this level, then the next down side target becomes 690; a break below 690 for more than 6 days would lead to a test of 600; an extreme down side target for Gold would be 550.

The main thing to understand is that the long term trend is still very bullish and will remain bullish even if Gold were to test the 550 mark. If gold does actually trade down to the 550-600 ranges, traders should not view it as a negative development, but should instead treat it as lovely buying opportunity.

The current fear and state of turmoil in the market is creating incredible long term buying opportunities in the commodities (Palladium, Silver, Copper, Platinum, Coffee, soybean etc) sector. Investors should treat such extreme conditions as opportunities rather than take the herd mentality and view them as disasters; historically the masses have always been on the wrong side of the equation and there is no reason to expect anything different this time either.

"If I had to select one quality, one personal characteristic that I regard as being most highly correlated with success, whatever the field, I would pick the trait of persistence. Determination. The will to endure to the end, to get knocked down seventy times and get up off the floor saying, "Here comes number seventy-one!" ~ Richard M. DeVos 1926-, American Businessman, Co-founder of Amway Corp.

 


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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