Beware the Oil Slick!

By: Clif Droke | Thu, Jun 2, 2005
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The crude oil price remains an abiding concern for Wall Street as witnessed by the almost inverse correlation between daily stock market and oil price fluctuations. The sharp rally in crude oil, while not completely escaping the notice of the financial press, has been ignored by most investors as euphoria and greed are the dominant emotions right now. But as experienced traders well know, these are emotions that typically precede market peaks.

In my commentary of two weeks ago entitled "Keeping Inflation Under Wraps for Wal-Mart" I remarked, "The latest crude oil price graph below shows that a lingering wave of upside momentum, as reflected in the 200-day moving average, has come to the rescue for the oil price to provide temporary support. Oil should be able to remain buoyant for a while considering that its 90-day and 200-day moving averages are still rising, with a zone of resistance between $52.00-$54.00 and support around the $47.00 area." So far this has been the case and the recent oil mini-rally has once again picked up steam.

The above chart shows oil in relation to its 40-week (blue line) and 60-week (red line) moving averages. These trend lines reflect the momentum that oil still has in its favor that provided the expected support above $47.00 two weeks ago as well as the subsequent rally to the most recent high slightly above $54.00. After a period of rest and/or consolidation, the charts suggest that crude will make another stab at those March-April highs before all is said and done.

How high could oil rally before finally peaking again? A $60/barrel oil or slightly higher would not be surprising. This would be a perfect coincident to the next dominant interim cycle bottom in July. Wall Street has been conveniently ignoring the rising oil price of late but that ignorance cannot continue much longer. As the month of June progresses we'll likely see the recent upside momentum in the broad market reverse sharply and give way to a developing downside momentum of stock prices as investors finally respond to the resurgent oil price among other things.

An article from a recent Financial Times newspaper was headlined "Business leaders laud the Goldilocks Economy," while a recent Associated Press article proclaims "'Goldilocks economy' looking just right -- Conditions not too hot, not too cold, but will investors notice?" From the looks of things it's all starting to fall into place...

The above graphic is the cover of the latest Business Week magazine of June 6. This is extreme bullish sentiment (from a normally conservative publication) is once again another clue that the market has done its job of eliciting the emotional excess normally concurrent with a market turning point.

Indeed, the mini blow-off rally of the past few weeks has done its job of luring in the unsuspecting for the next move in the stock market. The next move down promises to be equally extreme before the next cycle bottoms.


 

Clif Droke

Author: Clif Droke

Clif Droke
ClifDroke.com

Clif Droke is a recognized authority on moving averages and internal momentum. He is the editor of the Momentum Strategies Report newsletter, published since 1997. He has also authored numerous books covering the fields of economics and financial market analysis. His latest book is Mastering Moving Averages. For more information visit www.clifdroke.com

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