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MaskedMan2007 (99.25)

Where are gold and crude oil going ?

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12

August 11, 2008 – Comments (7) | RELATED TICKERS: GLD , USO

Since mid july, the oil barrel started to decline. Since then, we have seen an impressive market rally and an oil price that is still declining. All the financial press is now trying to make predictions on where are oil and gold and other commodities going. Is it the time to buy on the dip or sell it, or short it?

Here is what I think, based on my technical analysis. Note that this analysis is based on my short term target price.

First, take a look at crude oil. Here is the chart of the last 6 months.

In 1 ou can see a line that I draw that links four different points on the chart. This is the trend line identifying the last uptrend of the crude oil. This trend has been broken below 135$ mid July.

Later in July, you can clearly see that the established support in June at 132 has been broken few days later (line identifed by 5). So there we have two technical bearish signs, an uptrend broken and a support broken.

Then, the line 4 represents a 3 time tested support at 120$. The support have been tested in May, June and July. A tree times tested support is considered a solid and important support. This one has been broken at the end of July/beginning of August. This is another bearish sign that establish a clear down trend.

At 3, the line represent the next support. This is the next step where the price of crude oil should stop. This will be another important point, but this support has been tested only once. So I think that this one should not hold very long. You can see that the previous support at 4 has been tested few times before being broken. The price stabilized just above of it for almost a week before going lower. This is another sign of important support.

I think that the line 3 do not represent a strong support. I think that the price of crude oil is headed to something around 100$ on a short term basis (few weeks). You can see at this price level that there is an already established and tested support. This support has been tested on February, March and April. This is a sign of strong support. So I expect to see some price stabilisation at this level. Then we will wee what happen. This could be the time for a rebound, or just a pause of a few days or few weeks before going lower. I think that this support should be tested a couple more times before going lower, if it has to go lower.

So short term, I think that that oil is going to trade around 100$ sooner than later. At this level, this will be the time to make a new in depth analysis of the price action. So for a short term profit, short oil if it breaks the 110$ support (line 3) and buy back around 100$. Now is clearly not the time to take a long position in crude oil or energy stocks.

 

Now, let's see where gold is going. First, take a look at the one year chart of gold.

The line 1 links 3 different support. This line is the trend line of the last up trend in the price of gold. This trend has been broken below 950 in March.

Line 2 represents a very important support. You can see on the chart that this support has been tested 3 times, in January, in April and in June. Each time the price reached this level, each time the gold price went higher in 2008. So, it means that the 850$ for gold is a very important level. You can see that the today's price action (August 11th) clearly broke this support. When an important established support like this is broken so sharply and strongly, this is a very bearish support. The chart is clearly drawing a downtrend now. So gold is clearly going lower now.

The next support is identified by the line 3. This support has already been tested twice, in November 2007. This support is not as significant as the one broken today (line 2). I think that short term (few days or week) this is clear, based on the current trend and price action, that gold will reach the 775$ level. Then at this level, we will see what the price action will.

My take is that the established support broken today was so important and has been broken so sharply that I think that the gold price is going a lot lower on a few months scale. Time will tell, but keep in mind two things : first, another good analysis of the price action should be done when the support of 775$ is reached and second, if you do not want to lose money, avoid gold and gold stocks for now.

So, you can use these informations to trade GLD, USO or any other ETF that represent oil, gold or their relative sectors.

Good luck

 

 

7 Comments – Post Your Own

#1) On August 11, 2008 at 10:32 PM, TDRH (99.76) wrote:

Appreciate the analysis.   I say oil bounces around $118.00 as long as the dollar stays relatively stable. 

Gold price/dollar are dependent on the global confidence in the US financial system.   The fed discount is where it is at to try and bail out the financial sector, the spread remains the same and in fact is increasing in the case of the 30 year mortgage.   Graphs mean nothing if the derivative exposure of JPM and BAC have to be valued by the market.

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#2) On August 11, 2008 at 11:31 PM, awallejr (82.72) wrote:

I tip my hat off to Jeff Macke of Fast Money with his "crayon" argument.  Once oil fell below the line it was projecting up, same with commodities, it kept falling.  While from a valuation point of view I still like many of the sectors long term, short term care needs to be taken.

The market loves to over react.  Always has alway will.  Energy stocks have been pummeled too much in my opinion.  But I always take a long term view of things and right now I see alot of stocks at attractive long term prices.

 

As for gold, I have never been a fan of it. Can't see me spending a gold coin for food.  It will always go up in the long run, simply because of inflation.  Short run is anyone's guess.

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#3) On August 12, 2008 at 12:11 AM, TMFSarahGen (99.76) wrote:

This is really good stuff maskedman.  It takes some effort and time to mark up those charts, and then embed them in a blog with comments about them, so thank you!

BTW, I agree completely.  I would note that every time I post about gold, oil, or the ag stocks and say they're going down - or that they're very weak, someone writes me to tell me I'm an idiot.  Takes two sides to make a market, but I wouldn't be looking to buy gold, oil, or ags in real life or CAPS right now. 

This fall off in gold is pretty darn vicious.  Off even more over night (it closed in NY today at 823, trading now at 808).  BTW, anyone who likes to check the price all the time, bookmark this link to the 24 hour live gold price chart on Kitco.  Live gold chart.

Thanks again for all your work and comments! 

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#4) On August 12, 2008 at 11:14 AM, anchak (99.86) wrote:

I agree with Sarah...Thanks for the effort. This is good..... Also I have a request....Can you look at FCX....Freeport McMoran has been pretty much the harbringer of a trend as far as metal stocks go as per my analysis. Thus your look at XAU possibly need to be correlated with that.

My feeling is the stocks correct a little earlier than the base.

 

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#5) On August 12, 2008 at 12:11 PM, eldemonio (98.74) wrote:

Short term analysis of oil is sketchy at best.  When  Armadidyouknowiwascrazy passes gas in Iran, prices are affected.  Every time conflict breaks out in the middle east - prices are affected.  When Hugo makes a laughable threat in Venezuela, prices are affected. 

There are so many reasons for oil to go up from here - what are the reasons that it will continue to go down during the next year?  More supply?  Less demand?  

Shorting oil right now is a gamble, and those making money shorting oil shouldn't necessarily be called good gamblers - maybe they're just lucky. 

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#6) On August 12, 2008 at 6:25 PM, abitare (58.10) wrote:

Commodities are in a bubble, people are taking profits near term. They may continue up in the long term with hyperinflation
.

 

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#7) On August 12, 2008 at 6:42 PM, MaskedMan2007 (99.25) wrote:

anchak : gold stocks is closely moving with the gold itself. But there are always differences, as one day gold go down hard and same for gold stocks, and the other day, gold is going lower and the gold stocks are making a rebound. The important is to make sure that the commodity and the sector are following the same trend.

 

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