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Crude Oil Going Parabolic: The Good News and Bad News

by: Kunal Vakil posted on: May 25, 2008

I want to take a minute and discuss the oil futures situation. It seems that they continue to rise with no end in sight and that gas prices at the pump are destined to continue higher. Do you want the good news or the bad news first?

Well, I’ll start with the bad to get it out of the way. The crude oil futures contract looks like it is in the beginning phases of making a parabolic move of some sort. Even with all the chatter about a top in oil, structurally, it is still bullish and continues to move higher without any significant pullbacks. Technical indicators would tell you that this thing is extremely overbought and it is, but overbought markets can stay that way for quite some time (i.e. stock market bubble from 1998 to 2000). At this point, crude futures are driven primarily by speculation and this being said, I am looking for a blow off top to put an end to all this insanity. This means that we will probably be looking at a move to 150 and potentially higher in the near term. 150 will be a psychological magnet for the crowd.

Oddly enough, we still do not have an investor community that is overly long or bullish the black gold. When looking at the commitment of traders report for crude oil, you can see that we have not achieved high levels of optimism as of yet. In a parabolic market such as this, we need to see tremendous buying and bullishness to mark a top. It will happen soon, I believe….

The good news….well, once this parabolic top is put in, the crude futures should get CRUSHED. The stronger the parabolics, the stronger the decline that follows. The top that we are putting in here should be a level that we don’t see for quite some time. Maybe they are running this thing into the July 4th holiday? We will see but it will come back to reality sooner rather than later.

Now, if crude decides to break down through the last swing low at about 120 on the chart above, the entire picture changes for the worse.

Stay tuned and do not speculate in this market if you are a beginner at trading futures. You may get your shirt ripped off, literally.

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This entry was posted on Monday, May 26th, 2008 at 9:04 am and is filed under Price of oil. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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1 response so far ↓

  • 1 jkingsdale // May 26, 2008 at 9:20 am

    I have always said that the price of oil in the short term is not predictible. That’s why my preferred approach to “playing” peak oil is to own stocks in companies who’s value is enhanced by higher oil prices over the long term and to own options on long dated futures.

    On the other hand, it is gernerally true that “the trend is your friend” and that when trends turn parabolic they are often reversed in a mirror image.

    So, what to say at this point about oil short term that is other than nonsense? It seems to me that this post and the one below about Soros have similar views that make sense. They both suggest to me that since the oil price rise from its last correction level of $50 in early 2007 has been steady and growing in strength but not yet parabolic, it seems to have further to go. Thus the idea of $150 or $200, perhaps with a parabolic blowoff. That sounds likely to me.

    If that comes to pass, then the lion’s share of profits for oil bulls in the short term are still to come. As some have pointed out, that was the case during the dot com craze that was apparent in 1998. But for anyone who decides to “play” oil on this basis (i.e., short term) please remember that you are speculating, not investing. An awful lot of speculators end up being unhappy and only a few make a great deal of money.

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