Sizing Up the Oil Rally

 | Jul 03, 2013 | 6:00 AM EDT  | Comments
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xle

I suppose we must start with oil today, as I have not discussed this chart in quite some time. I have been bullish on crude for what seems like forever -- but really it's only been since April! Back when I first posted the chart, I had thought a move up to $98 per barrel would be doable, but over time I noticed the head-and-shoulders bottom and upped the target.

Oil

Oil has since moved to the August contract, meaning a slight change in the numbers. But the next target has always been $100, since that is the "nice round" number, and you can see it also represents some resistance from last winter.

The funky-looking head-and-shoulders bottom (line A on the chart) now measures to around $106 (adjusted from the $107-to-$108 area on the previous contract). If we wanted to be super bulled up, we might even establish a $112 target, using that entire pattern as the head-and-shoulders bottom. I think that, for now, we'll stick to first target of $100 and then another one near $106.

Please keep in mind that oil is now being driven by news events out of the Middle East, so as that takes hold I don't think chart patterns will be quite so reliable. In other words, I'd be more comfortable if all of this action had transpired without news.

We can tell this is being driven by political events, because the Energy Select Sector SPDR (XLE) barely rallied Tuesday. The only good news for XLE has going for it is that the price hasn't broken the uptrend line. But please consider the flip side: Why can't it even rally to the downtrend line when oil is kissing $100? I'll call it trapped, and I'll consider that a kind word for it.

XLE

The transports constitute another area that ought to be affected by higher oil, and the head-and-shoulders top is still present in the Dow Jones Transportation Average. Since I am always on the alert for what can make my view wrong, though, let me say this: I am actually quite surprised that, even with oil at $100, the transports are still hovering at 6200, rather dropping back to 6100. In light of this, perhaps I am wrong to be so negative on this group?

Dow Jones Transportation Average

The next few days will have investors on their toes as the U.S. takes Thursday off to celebrate Independence Day as events unfold in Egypt. That's not to mention that the European Central Bank has a meeting scheduled for Thursday. As if that weren't enough, the employment number continues to loom for Friday. If not for all of that, I would look for the S&P 500 to undergo one more rally above 1620 and get rid of that obvious resistance. I hate when something is so obvious that all eyes are focused on it!


 

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