Wednesday, May 11, 2011

Thursday Oil Market Analysis

Last week I wrote the following about the oil market:

In short, I don't see the market moving strongly in either direction. As prices approach the 114 level, I see them hitting resistance, especially as news of gas prices gets publicity. However, there are strong supports for the market as well.

Basically, I think we're in for a fairly tight trading range near term.
As if on cue -- on the very same day I wrote that phrase -- the market tanked the most in the last few years.

Oil market 1; Bonddad 0.

In my defense, I was looking at my reasoning and, given what I knew then, I would make the same call today with the same information. I think last week we saw the commodities equivalent of a flash crash which no one can predict.

Let's take a look at the chart to see what it says this week:

Click for a larger image.

We clearly see the move lower, with prices printing some very strong downward bars. Prices also moved through the EMAs and the 10 and 20 day EMA are now both moving lower with the 10 day EMA already below the 50 and the 20 day EMA fast approaching that level. In addition, we see the rebound trade print one strong bar and one weaker bar, but with resistance at the EMAs. Yesterday, prices printed another strong bar lower.

Click for a larger image.

The 5-minute page shows the drop, the rally along a slightly upward trend line and then yesterday's move through the trend.

Yesterday I mentioned that I am now a bit cautious on commodities. The reason is there is now evidence that some of the faster growing economics (Brazil and India) are slowing down. China's inflation rate is now higher than desired, indicating the PBOC will continue raising rates. And gas demand in the US is dropping as a result of lower prices.

At the same time, we're not crashing, just slowing. While the US economy printed a slow 1Q, there are no signs of a double dip. As such, I still see a very tight supply/demand situation.

Right now, I have no read on the oil market and would avoid it; there are simply too many wildcards in the mix currently.