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TAM's Morning Cup Of Jo: February 27, 2012

|Includes: iPath S&P Crude Oil Total Return Index ETN (OIL)

"The history of the past interests us only in so far as it illuminates the history of the present." - Ernest Dimnet

What a crazy weekend for Central Florida; from the All Star celebration to the Daytona 500. Talk about bringing a variety of people from every walk of life. If that was any indication of the broader Economy, it's no wonder the market has not stopped for a breather thus far this year. Frankly it was quite the shocker to see TAM's Friday afternoon traditional get-together at the local gin-joint, go from local business professionals to a $400 cover charge with an hour wait to get in. P Ditty even paid $25K a night to rent a condo adjacent to our new office. Can you say… Gouging? Perhaps we're just use to the "small town" mentality. We'll soon find out the "city" mentality when we speak at the Annual MTA's (Market Technician Association) annual symposium in April at NY's Pier 60. Nonetheless, it gave us a nice 'excuse reprieve' from coming into the office over the weekend.

With all the visiting "Bling" throughout the weekend it couldn't be helped to think about commodities and this past week's resurgence (all except nat-gas, which is toying with a 12-year low). For as long as people have been investing there has been Wall Street Adages which surfaced to remind investors of typical misstates.

  • Never short a dull market
  • Climb a wall of worry
  • Rising tides lift all boats
  • Don't fight the tape
  • The trend is your friend
  • There's always a bull market somewhere

But my favorite of all is… "It's the lightning bolt you don't see that kills you." However, this particular adage can be somewhat aloof. Essentially it's when everything seems too good; particularly in a market that has been as schizophrenic as ours over the last decade plus. Otherwise stated: an investor's optimism should be held with some semblance of cautiousness and be aware of their surroundings; hence our missive today - money-flow into commodities.

Watching money flow is an essential part of being a portfolio manager. You can invest in the greatest company in the world, but if no other investors hold the same opinion, you could be sitting on a train which may never leave the station. Solution: find another rout. With commodities, especially oil, this can be a double edge sword. Last week WTI (West Texas Intermediate - otherwise coined light sweet) jumped over 6% and broke a massive 10-month base with a nearly perfect symmetrical pattern. About 10-years ago we coined a term "Two Headed Monster". It referred to a Head & Shoulder pattern with two heads. This Oil pattern requires yet a new name - to be determined. (Please email us any suggestions and we'll post the Winner next week and add it to our technical glossary) Essentially, crude shows an inverted two headed monster, but with two sets of shoulders. See below.

OIL Daily Graph

Obviously the name is irrelevant. But what isn't irrelevant in technical analysis is the symmetry. The more symmetrical the pattern, the more relevant and formidable; ie. trustworthy. As you can plainly see the two left and two right shoulders' drawdowns are nearly identical; along with the time associated with creation. The same goes for the two heads. This is all good but, what's really great is its congruency (reminded from my 13 year old son's homework). If you were to fold the chart in half based on time, its nearly identical (Blue Line). So what does all this mean? The more "formidable" the pattern, the more likely it will achieve its goal (measured move). In this instance we add the size of the base to the neckline break. {$30 move from Trough to Peak added to the neckline of $105 equals $135.} When calculating the time it took to build the base (10 months), this indicates (assuming a technically perfect world) would put us at year end. (Please do not mistake - THIS IS NOT A PREDICTION OR RECOMMENDATION - but merely a technical observation)

So what about the double-edge sword and lightning bolt comment earlier? Many investors are anticipating a correction (small or otherwise) - nothing goes up forever; another adage. What no one knows is what the catalyst will be - considering it seems as if no one cares about Greece anymore as the US Markets have become completely bifurcated from the rest of the world. However, once Oil (NYSE:WTI) reaches $110 a barrel you will begin to see many economists, pundits and traders discuss the relation of Oil prices to GDP. When that happens, by taking a lesson from history, it will spread like wild-fire and that will be the new focus.

We hope this helps.