Trader’s Narrative

At the start of the summer, when oil was setting records and trading at ~$135/barrel I showed an interesting graph which showed the price of oil in gold.

I wanted to show that even priced in this currency - which many feel is superior to the beleaguered US dollar - crude oil was just too expensive and ready to come down to more realistic levels.

Since then the price of crude oil has fallen to ~$96 and many see it continuing the slide lower.

Elizabeth asked for a followup now that a few months have passed so here is a more recent chart:

Still Expensive?
To get an idea whether oil is still expensive, priced in gold, it depends how far you want to go back. If you look back just a few years, it has a bit more to fall. But if you go back to 1994 or 1999, then oil could potentially fall much, much more.

Consequences
While attempts at a new financial bailout is plodding through the halls in Washington, the consequence of any sort of bailout is that the price of oil will remain high. This article from Forbes explains why.

My personal conviction is that there should either be absolutely no bailout - allowing rotted financial institutions to declare bankruptcy. Or if the government gets involved, it should be state capitalism, not socialism. Which means that the US should follow the Swedish model and ask for equity. If they want to hammer out a deal quickly, they can use similar terms that Buffett got from Goldman Sachs (GS).

Today’s market got spooked in the morning with the release of consumer price index data showing a more than expected 0.4% rise for January, Almost all components, including energy, contributing to the increase.

Yesterday crude oil futures (March 08) jumped $4.51 to close at $100.01 and today they reached $100.74 - so what better time to look back at my previous comments about Texas tea.

Last December I wrote that I saw a double top in crude oil, here’s how it has fared since:

The $100/barrel level is proving to be mighty resistance for crude but the more prices butt heads against it, the more fragile that glass ceiling will become.

This is the fourth time that the bulls have attempted to breakthrough but it is the highest they have been able to push prices so far. So the double top I thought I spied last year has now become a potential quadruple top.

When the market was going to hell in a hand basket in the middle of January, I didn’t write anything specifically about energy or oil stocks but if you were reading the blog then, you couldn’t have missed the unmistakable bullish bias.

During the same time, the bullish percent index for the energy sector reached a low of 7.06% !! To put that in perspective, we’d have to go back to the bear market bottom of 2002 to find a lower bullish percent reading. Since it was a full market meltdown, the same was happening for almost all sectors.

In January 2008, as oil stocks were topping, the bullish percent reached a high of 75.29%. In comparison, the current reading is 71.76%, definitely getting up there but still not extremely high. Which is why I think that if you scooped up cheap shares in the January fire sale, here would be a good time to start offloading them.

Crude may breakthrough the magical $100 barrier but right now there is too much frenzied attention around it and it has climbed to far too fast to continue at the same pace without first catching its breath.

If all this talk about “bullish percent this” and “bullish percent that” in confusing you, read:
How To Time the Market With Bullish Percent Charts