Oil's Chart Shows Weakness

By Bryan McCormick

Crude oil's chart looks weak at the moment, which could be trouble for the S&P 500 because energy is nearly 12 percent of the index weight. In fact, were it not for the industrials and technology, along with the boost in the financials of late, energy might have helped drag the S&P far lower.

As we learned on the way down last year, sectors need to work together. Narrow breadth in sector advances mean that broader rallies are generally not stable.

If the trend in energy, and crude is the backbone of that sector, remains down, the index could have a great deal of trouble making stronger advances. It means every other sector has to pull harder for that to happen, making it less probable.

On the daily chart of crude, I have drawn in two trend lines for us to look at. The green line is the most recent uptrend. We can see how that was broken today, when price crossed below $68.50.

The yellow line, however, is the one where the real problem lies. The move down today confirms a break of that trend ine, which stretches all the way back to March. For now, the primary uptrend in crude has been broken.

As we well know, the price of crude can be extremely volatile. It is possible that next week could show a draw down in crude, sending price higher again. But with the primary uptrend line broken, and next support not until the $62.50 area, we could see some downside pressure if bullish data does not emerge.

(Chart data provided by Thomson Reuters)

Comments

[VSD]

Oil is going down to 55. It is the last stimulus that we have left to offer.

2009 Sep 24 03:12 PM

[Macro_Man]

how do we know that the trend line is "broken" and not merely "needs to be redrawn. Trend lines do change and false breaks are also very common.

I am bearish on oil also, but not sure if oil has started its downward trend just yet.

2009 Sep 24 05:02 PM

[BullnBear]

I believe that the dollar strength is what knocked Oil down lately, not the supply issue at least to the degree that this has been “sold” in the mainstream media lately.

I may change my tune if after the G-20 we still see U.S. dollar strength from a trading standpoint because it sure seems like we are up against a great deal of dollar bashing from a global perspective.

Before you read me wrong I want to make it clear that I believe that we do have a supply issue, I just believe that the sudden dollar strength is what ran oil down so far this week.

2009 Sep 24 09:28 PM

[Ryu Mei Co]

The Oil bull run is already done, in my opinion. It is almost the same thing as getting bored playing with the same "toy" over and over again. How long has it been? 6months?

China-Oil bull play is done!
Weak USD-Oil bull play is also done!
Economic Recovery-Oil bull play is way over done!

What else is there to make another bull run?

Demand is still weak, supply output remain same, and inventories have increased.... OPEC remain cautious, Sinopec said China has huge supply of oil in storage.......do I need to add more?

2009 Sep 24 10:01 PM