OIL IS RETESTING LONG-TERM SUPPORT AT $40 -- COMMODITIES TESTING MOVING AVERAGE SUPPORT
CRUDE OIL TESTING $40 SUPPORT... Last week's price drop has pushed crude oil within a dollar of potential long-term support around $40. I've written a few times about my belief that $40 would be the new floor under the oil market. That belief is being tested. Chart 1 shows two chart reasons why I believe $40 is important. First is that fact that it represents the price peak hit in early 2003 just prior to the second Iraq war (see circle). The $40 level also represented major peaks formed in 1980 and 1990. Major resistance levels, once they're broken, usually become new support levels. The second reason has to do with the rising trendline extending back to the second half of 2003 (see arrow). That's also sitting right at $40. Some of our readers have asked if this is the right time to jump back in. Personally, I'd rather wait to see if crude starts to display some strength from this area. One way to keep track of that is with a point & figure chart. Chart 2 is a p&f chart of crude plotted through Friday. (Crude is bouncing a bit today). The box size I'm showing here is based on "percentage" changes in the price of crude, which is preferred by many p&f chartists. Each box is worth 1% of the price of crude. The red boxes show Friday's price drop. On that chart, the trend of crude is still down. To give an initial buy signal, the price would have to rise to 43.51 or 43.95. I'd feel more comfortable with a p&f buy signal on my side.
Chart 1
Chart 2
ENERGY SELECT SECTOR SPDR BACK OVER 50-DAY LINE ... One of our readers asked how to combine moving averages with p&f buy and sell signals. Here's one way. The daily bars in Chart 3 show the Energy Select Sector SPDR bouncing off potential chart support along its October/November lows. The XLE is also trying to climb back over its 50-day average. That's somewhat encouraging action. However, here again, I'd prefer to see a p&f buy signal as well. Charts 4 and 5 give two versions of its p&f chart. Chart 4 is a longer-range version (using a percentage box size). It shows five zeroes around the 34.60 level. That makes that a pretty significant test of support. It also means, however, that any price drop to 34.27 would be a significant breakdown. Chart 5 is a more sensitive chart of the XLE. It shows the XLE close to give an initial buy signal at 36.10. Other buy signals would take place at 36.40 and 36.60. Keep in mind that any money committed to energy at this point would be in the form of a "probe". And it would have to be liquidated if last week's lows were taken out. It might be ok to start "tip-toeing" back into the energy patch. Just be very careful until the price of crude starts to show some new signs of strength. One encouraging sign is that colder weather in the northeast is boosting the price of heating oil and natural gas today.
Chart 3
Chart 4
Chart 5
CRB INDEX AND GOLD BOUNCING OFF SUPPORT... Crude oil isn't the only commodity testing important chart support. The CRB Index is bouncing today off of its 200-day moving average (see red arrow). The CRB is rising over 3 points today with all but three of its seventeen commodities rebounding (Chart 6). If the CRB uptrend is to be maintained, this is where new buying should start to surface. Gold is jumping more than $5 today as well. New bullion buying is coming a good time -- for two reasons. One is because gold is testing its 50-day average. The other is that it's also testing its early 2004 peaks over $430 (Chart 7). [Here again, previous peaks should now act as support]. Chart 8 shows the Gold & Silver (XAU) Index bouncing off chart support along its October/November lows and its 200-day moving average. With the dollar under pressure again, and so many commodities in potential support areas, this seems like a logical spot to do some "nibbling" back into commodity-related assets.
Chart 6
Chart 7
Chart 8
