Friday, July 3, 2009

Why Does Crude Oil Look Bullish In Global Recession?

This must be one of the questions that confound people who believe deflation is coming. I am not one of them, as I look at the 3-year weekly chart of crude oil.

The chart looks very bullish. On a weekly chart, exponential moving averages (13-EMA and 34-EMA) seem to work well; their crossovers seem to indicate a new trend well. The crossovers of these moving averages also coincides with very slow stochastics (60, 3) crossing 50.

Right now, 13-EMA is just about to cross above 34-EMA, and both EMAs are turning UPWARD. RSI looks well supported at the trend line. I don't like slow stochastics still very far from 50 and turning down slightly, but since this is a weekly chart I'm willing to give it several more weeks.

Besides, the formation since the last EMA crossover (September 2008) looks like a cup and handle, with the handle forming above 50% (barely, but still above) retracement from the bottom to the price immediately before it started to tank in earnest.

If this formation breaks out of the handle, the target price would be the handle high ($73.90) plus the depth of the cup ($38.77), which will take the crude oil to $112.67, a 69% increase from today's close at $66.73.

With dismal news all around us again, this number looks literally fantastic (i.e. that which exists only in fantasy). Or crude oil price movement is telling us it is inflation, not deflation, that's coming our way.

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