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Tuesday, September 09, 2008

 

oil oversold


i have had my head handed to me on a platter in oil over the last few weeks. i was right going short from $145 to $120; wrong going long from $120 to $105. so take this with a grain of salt.

oil is deeply oversold and due to rebound. we may be reaching a selling exhaustion.

as first evidence, demark indicators on USO. the daily shows that the 7/28 setup has set the stage for a subsequent demark countdown buy if today's close is below the 9/5 low.

moreover, the weekly chart of USO is showing a demark setup buy as well. this confluence on different timeframes would seem to indicate that oil prices should rebound from a fitful selling episode.

looking at the stock basket DJUSEN, which underlies the DIG/DUG ETFs, one can see positive divergences forming in this latest downthrust. for example, volatility envelopes indicate a deeply oversold conditon but a rising divergence.

the example of new 20-day and 65-day new highs less new lows in the 92-issue basket is showing a similar pattern -- downside intensity is waning.

oil is getting waxed again today and is now down nearly 30% from peak. bennett sedacca has been tracking comparative bubble charts, including that for inflation-adjusted oil. (bloomberg's updated ticker here.) one can discern an upside reflex rally in most bubble curves, which carry a distinct and similar shape because they are the reflection of a distinct and similar psychology. i suspect that rally in now in the wings.

on the flip side, though, one has to consider the contrarian ramifications of information such as yves smith is passing along. i'm of the mind that a massive speculative bubble in oil has indeed broken, and price can fall a long way, peak oil or no peak oil, in a deflationary bust.

UPDATE: keep eyeing the dollar.

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