The attack on Saudi Arabia‘s oil infrastructure over the weekend has spiked the price of crude oil to almost $60 per barrel. That is a whopping 8%+ increase over last Friday’s close which is significant. Being cycle analysts, it is our job to figure out what this recent move has done to crude oil‘s cycles. We always zone in on moves such as these as we should at least register a daily cycle low if not a broader intermediate cycle low. If it turns out to be the latter for example, it would definitely spell opportunity for something like a multi-month swing trade to the upside.
Commodities invariably use “events” to confirm highs and lows in their cycles. Being chartists, we do not overly concern ourselves with why crude oil rises or falls but rather how the technical charts are cycling. Instead of attempting to “predict” where prices will go, we let the charts tell us which direction price is most likely to go. Trading and investing in this way keeps us extremely objective as our assumptions or beliefs come in a distant second to what are charts are telling us. Here is how we view the charts at present with respect to the sizable jump over the weekend.
As the daily chart shows above, price now has closed above (by some distance) the 10-day, 50-day, and 200-day moving averages. This means we at least have a half cycle low if not a daily cycle low in place. We state half cycle low because crude oil bottomed on the 3rd of September at just over $53.40 a barrel. This means that low is only 18 days after the previous daily cycle low which took place on the 7th of August. 18 days is very short for the duration of a daily cycle in crude oil. Furthermore, we didn’t get a strong oversold reading on the RSI indicator which is indicative of daily cycle lows. Therefore, caution is warranted at this point as price may very well close back below the daily trendline (drawn below) over the next month or so to finally confirm a new bottom.
The weekly chart definitely looks more convincing. Price bottomed back in August, 32 weeks after its previous intermediate cycle low back in December of last year. 32 weeks definitely is in the cycle band for an intermediate cycle low in crude oil. Both the stochastics and the RSI momentum indicator got to oversold levels which were indicative of intermediate lows. Furthermore, price is now well above the 10-week moving average and has also closed above the down-cycle trend-line. Therefore, in all likelihood, we are starting week 6 of this intermediate cycle meaning we should have plenty of weeks of rising prices ahead of us.
On the monthly chart, we seem to have a long-term symmetrical triangle in play. These patterns more often than not end up being a continuation pattern. The pattern merely represents a pause in the current trend. Furthermore, with the price of crude currently at around $60 a barrel, price is threatening to break above that upper trend-line once more. Moreover, the 10-month average is finally moving up which again is a strong signal that higher prices are ahead.
Therefore, to sum up, crude oil does not look a bad long play at this present moment in time. Both the weekly and monthly charts look encouraging. These charts are the most important for long-term investors. Over the short term, we may have some downside movement in order to confirm a new daily cycle. The August lows though should hold if our cycle analysis is correct.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in USO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.