Update on Oil, Gold and the USDX
This post is an update to my last 3 posts on oil. Please read these first to understand where I was coming from. They are: Short Term Oil, Short Term Oil - Update, Short Term Oil - Update 2 (Intraday).
Oil has definitely formed a bottom (at least of for this cycle of monthly declines and retracements) and is in a new uptrend. The long term historical support that was identified has held. Oil has been on a new uptrend that is several weeks strong at this point. The weekly MACD has triggered up, but it is not in positive territory yet. However it looks very strong to me. See the chart below
What I am doing. I started buying oil (the commodity mostly in the form of USO, UCO and DXO, and not producers) at $40/bbl. Averaged down when oil got to $35/bbl and have been slowly accumulating. Now that we are in an uptrend, I am buying on all pullbacks. I haven't bought any in the last couple of weeks and I am posting because I think we will be getting a pullback soon.
The daily chart looks overbought and oil is running into its first real resistance zone around $50-55. I bet we will get some kind of pullback from this level. I am waiting to time my next oil purchase until I see how far we pullback.
So what are some reasonable targets for oil in the coming weeks and months? Now that the bottom has been established (at least of for this cycle of monthly declines and retracements), lets looks at where we were. Oil topped out at ~147 and bottomed ~35. Doing just a 38% retracement (which I think is very possible) puts oil around $77/bbl. That is what I am targeting and where I plan to start selling. All kinds of things can happen between now ($50) and then ($77), but that is a loose gameplan and I will adjust mine as the chart unfolds.
So that is the technical picture for oil that I see. And I know that I said in my first post that this blog and account will be focused on just the technical picture as much as possible, but I have to do a little fundamental analysis here too. I just can't help it. It is how I think. I use both tools all the time (TA and FA) just on different timescales. This move in oil though will straddle the line.
There have been some really good discussions by all of Caps recently, but by StatsGeek and Tastylunch in particular regarding oil and inflation. The common line from CNBC is that rising oil prices is a catalyst / precursor for economic growth and the this rise is seen as a good omen.
....huh?.... Because that is completely false. Rising oil would be detrimental to the economy, and rising oil prices are a function of OPEC output and inflation.
So lets talk about the inflation aspect, because this one is a doozy. Based on the events yesterday (the Fed making a huge announcement about buying a HUGE amount treasuries directly) Quantativie Easing is kicking into high gear. Now does this mean inflation happens automatically and immediately? No. There are still short term deflationary forces at work. But I have become conviced for a long time that this is a Deflation Scare. And we have to be very careful about how inflation and deflation is defined. Please see several of my recents posts (from binv271828) about both inflation and deflation:
- Steve Saville: Market Value, Money and Credit
- John Mauldin: The Endgame
My opinion (obviously all of this is) is that behind the backdrop of decling asset prices (what almost everybody calls deflation, even though in and of itself, it is not) money supply has been growing substantially. It is in fact politically desireable to spur inflation to fight "deflation", for Congress, the Treasury and the Fed to be seen as doing "something / anything". Inflation just got kicked into a higher gear yesterday, but based on Savilles arguments and historical correlation, there is a lag between the increase in True Money Supply and everyday asset prices. So by the time that increase is actually felt by the public the Fed and Treasury will have already massively overcorrected. Estentially this next leg of inflation will be largely hidden from the public.
But there are some obvious early respondents: namely gold and the US Dollar
The USDX has a 3% drop yesterday!!!! If you have any idea how large the FOREX market it, you will be absolutely shocked by how much money that represents. Gold at the same time zoomed from 890 to 950 per oz. (Gold and the USD are very largely inversely correlated).
I think the USD has finally suffered a deathblow. Take a look.
I think being short gold and gold miners here could prove to be a very costly mistake. I will not tell anyone what to do, I am just saying that I am not.
So in summary:
- I think oil is heading up the next few months.
- Despite the fact that there will be a very good bear market rally for the next several months in the equity markets, high oil is NOT good for the economy and will prove detrimental in the long term
- I think the dollar has made a very important high recently, and the way it made it (and with the accompanying Fed policies) suggests real weakness for the foreseeable future.
As always I would love to hear your comments!
The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.