Wednesday, July 11, 2012

Is The Stage Set For A Rally In Oil

Above is a weekly chart of UCO which is one of several crude oil ETFs that I like to trade. There are a few significant technical factors on this chart that have gotten my attention and is the reason I am writing this post.  The first technical point I'd like to highlight is the bullish engulfment reversal pattern that took place 2 weeks ago. This bullish engulfment is very similar to the one that took place a year ago which kicked off a 5 month rally. What I like about the current engulfing pattern is that it has taken place right at a key support level which in my opinion adds strength to the bullish signal. Notice the heavy volume that took place at both bullish engulfing patterns.

The next weekly chart I'd like to show you is UGA which is the ETF for gasoline. This ETF has held a very significant uptrend line as well as holding a key support level. In the lower panel is the relative strength line of gas vs oil and as you can see gasoline is the leader and the stronger of the two.  The strength in gasoline should be a bullish influence and catalyst for crude oil as both markets tend to trend in the same direction.

Above is a chart of crude oil futures and in the lower panel we have a red line which shows the net position of the commercials.. As the commercials lessen their short positions or increase their long positions as a group, the red line will rise which is a bullish indication.  What I look for are levels in commercial activity.  As you can see the red line is now very close to where it was a year ago when the market bottomed. I would prefer to see the red line a little higher than where it is now but it is still at a level I would consider to be bullish.

The final chart I'd like you to take a look at is the 30 year seasonal  for crude oil. Notice that the months June through September tend to be bullish for the oil market.

In summary the pieces of the puzzle seem to be coming together suggesting that we may see higher prices for oil in the months to come. As always, lets see what tomorrow brings.

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