The Trader’s U E-Letter: Issue #186
Thursday, May 4, 2006

An Intermediate Top For Oil… Indicators Say “Yes”
by D.R. Barton, Jr., Chairman, Trader’s U

“The future belongs to him who knows how to wait.”
- Russian Proverb

A preponderance of evidence… The planets are aligned… All signs point to “yes”…

How many ways can I say that we have a pretty clear signal staring us in the face? Indeed, crude oil has once again given us a host of indications that it has made another intermediate top.

What can we do with this information? And should this change your long-term outlook for “black gold”? We’ll tackle those questions, but first let’s look at the evidence that oil has reached an intermediate top.

Barrels Of Evidence

Let’s look at what’s happened recently with oil (based on the data available on Wednesday, March 6) and the inevitable conclusion. We’ll review the technical, fundamental and, very importantly, the sentiment analysis.

Technically speaking… There is no doubt that oil has been strong over the past 10 weeks. But on bullish news this week (see the fundamentals section below), oil could not make a new high.

That, by itself, is huge.

But the new stretch Wednesday was done with weakening momentum, and we ended the day on a reversal bar at the low of the day. Let’s look at the chart:

The chart shows momentum dropping as we try to make new highs – and can’t quite get there. Take note of the support level shown, which corresponds with the old Katrina highs. We’ll talk about those in the action section below.

The fundamental picture. Global supply instability is the big story here. Iran and Nigeria are hotbeds of trouble just waiting to happen. The gap up in crude oil prices from Tuesday night to Wednesday morning are a result of the Iranian government’s concerns of force being used against them. But then yesterday, May 3, the U.S. showed a weekly increase in gasoline reserves for the first time in months, and the demand picture started looking less bullish. Added to that were new Iranian comments regarding oil flow (it stated that the country would not stop exports if economic sanctions were issued) and the supply side got some relief, as well.

Sentiment analysis. The big news of the week was that Bolivia’s new right-wing president and former coca farmer used military force to nationalize the natural gas industry. (I consider the stationing of soldiers at NG terminals to be a use of force, even if no shots were fired.) This is a big deal because it is a negative for global energy use and points to further destabilization in an already shaky international energy complex. But despite this bullish news, crude oil could not make a new high. In fact, it closed Wednesday at its lows of the day. This is one of the strongest and most useful market signals that I know.

The U.S. Congress is also giving us signs of a panic top. The insane suggestion that the government should issue a $100 tax credit to every family is so absurd that my third-grade economics students could win that debate. Crazy thoughts like this show the psychological fervor that exists now.

What’s A Trader Or Investor To Do?

I feel strongly enough about this set of circumstances that a prudent recommendation would be to tighten stops on any long positions. Anyone who is a long-term bull and wants to get into the market should at least wait until a pullback to the support line drawn in the chart above.

I still believe that oil prices will head higher in the coming months. But for now, we’ve hit an intermediate high.

SPECIAL NOTE: Iran is the wild card in these proceedings. If the UN votes on sanctions, or if bullets start flying in Iran, all bets are off!

Great trading,

D.R.

Today’s TU Tips & Tricks

• This isn’t the first time we’ve seen an intermediate top in oil… Remember Katrina’s aftermath? The huge run-up in oil after the hurricane season eventually found a way to cool off. Take a look at how that intermediate-term top took shape in Trader’s U #150, where you’ll find a review of investing in oil and how to apply some technical indicators to turn a profit: Investing in Oil: Is Black Gold Finally Topping Out…

The Chart of the Week

Microsoft (Nasdaq: MSFT) took a huge hit last week and has continued to struggle as some institutional sell stops were most likely hit. However, “Mister Softie” is a cash flow machine and won’t be held down for long. This stock is a buy when it breaks above its gap resistance on a closing basis.

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