My belief is that, when it comes to equities, the best course is to always trust the chart and rely on trends. Of course, these charts do not always prove to be correct. The chart is simply an instrument of statistical analysis. As we have seen in such events like the Bush v. Gore Presidential race, the statistical analysis of the exit polls did not accurately predict the race. So when we are making these statistical guesses, we have to utilize risk management in our trades. I could be wrong about oil and so you should not take this as a factual analysis, but merely an opinion based upon statistics. In layman's terms, this is an educated guess. So with that said, I will now move onto the reasons why I believe oil is going to $70+ per barrel. At the beginning of the year, we saw an event take place. This event did not happen overnight, but had been building up since July of 2006. Money was flowing out of energy stocks and oil contracts and into other areas of the market that were appreciating. The culmination of these outflows occurred at the start of January with oil suddenly tanking. I would like to point out that oil has broken through the trend lines and moving averages which is a very bearish sign. However, there are other patterns on this chart that give me confidence in this prediction. Notice the "V" formations that are everywhere on this chart. When oil has dumped down in the past, it has been followed by a 40% surge. So why did oil suddenly break down over the summer? Was it that everyone stopped driving cars? Did the demand for oil suddenly not exist? The answer to this question lies with Ben Bernanke. At the summer Fed meeting, the policy statements suggested that the Fed would not go too far in tightening and might even be loosening in the future. The ten year yield then plummeted until November. In response, the overall market shot up and money managers pulled their cash out of oil and energy related stocks. It was not that world demand had suddenly tanked, it was that money managers no longer demanded the investment as other equities were providing a better return. Recently, the Saudis had said there was no need for an emergency meeting. One has to ask themselves as to why...Here oil is tanking and the Saudis are smiling stating that there is no need for an emergency meeting. This is because the oil producing nations are selling their bonds quietly and egging up the ten year yield. As the ten year yield goes higher, the overall market will start to flounder. Money managers will bring their cash back to oil. The Saudis are aware of the bond market yields/stock market relationship. When the interest rates start jumping then the stock market will flounder. As I have pointed out previously, a ten year yield over 5% will most probably tank the overall market. However, the outflow of money will flow into other areas once again like oil and natural gas. My prediction is that oil will have an amazing 40% rally and reach up over 70 dollars in the next 6 months. Dr. Michael Roberts
Michael what do you think about this: http://www.softwarenorth.net/cot/current/charts/CL.png Commercial hedgers (who should know the market better than anyone) have built to a net long position. This has to be bullish for oil. What's your take?
Michael: What do you make of the high-yield funds holding up so well. They should be the ones feeling the effects of higher bond yield? ISEE index closed at 97 on Friday. This is a very low reading so I think there is more upside to go.
yes, i agree. we went long oil at 57.12 on jan 8 2007 when a long term long play was signaled. took heat from both our capital provider and market community at large since the entry was early. now, less than 30 days later, the trade is profitable and we are holding for the ride up. thanks for the cogent analysis. best, surf http://www.elitetrader.com/vb/showthread.php?s=&threadid=5285&perpage=6&pagenumber=653
Oil does what it wants when it wants. I doubt you can predict it well. But I know that oil does not cost too much. If milk cost $10/gallon i would probably drink alot more juice. But i would still buy gasoline at $10/gallon.
Totally agree. No one knows. So many different things could happen (global recession, major upheaval in Iran, etc). I wouldn't even try to predict long term. Great to trade short term though. Jay
What evidence do you have that oil producing countries are "selling their bonds quietly" and raising the ten year yield? Wouldn't it make more sense to argue that a decrease in the price of oil is bullish for the economy and hence stocks, and vice versa, than to assert there is rotation from stocks to oil as stocks decline? Now we have oil and stocks rallying. That linkage seems broken for the moment in any case.
the linkage is not broken. but you have no historical perspective or understanding please chart oil for 50 years. it is POSITIVELY correlated with equities, NOT negatively the negative correlation was (is) a RECENT phenomenon this is part of the reason why so many traders are unsuccessful. they cannot see beyond the recent past
Michael, The Globe and Mail ran an article from Bernstein saying the large/small speculators have 'deformed' the market ... and when they unwind, oil will be pulled down to $30-$40. http://www.theglobeandmail.com/servlet/story/RTGAM.20070212.w40oil0212/BNStory/ I looked at the COT report and they do have a long position of about 210,000 contracts...but the group also holds 254,000 short ( Nymex CL). This is the opposite of your hypothesis, but so far I am inclined to tip in your direction because even though the spec volume isn't miniscule, ... it isn't huge by comparison with the commercials (800,000 contracts long). Bernstein is no slacker organization. I appreciate folks with the courage to stand alone in their forecasts. Do you see any supportable logic here that speculator volume could 'temporarily' take us to $30-$40? Thanks! T200