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In the last update we suspected that
oil might be forming a Double Top with its June highs, and while the resistance
towards and at these highs has since kept the price of oil in check, we have
not seen the significant reaction expected. Instead, what has happened is
that the potential Double Top has morphed into what now looks increasingly
like an Ascending Triangle, which is bullish, and this pattern is now well
advanced, pointing to an imminent upside breakout.
 
We had a stop above our oil short just
above the June highs, and depending on how close you set it you may already
have been stopped out when oil tried to break above the resistance in the
vicinity of the highs during August. If you were not stopped out you now have
2 choices - one is to reverse position immediately and go long, which will
involve a minor loss, probably the best course of action as upside breakout
looks highly probable, placing a stop beneath the support line of the
Triangle, which would get you out for a small loss if the trade does not work
out. The other option is to allow yourself to get stopped out in the event of
upside breakout and simultaneously reverse position. This option has the
advantage that a new uptrend is more assured, but the disadvantage that it is
more costly. We prefer the first option due to an upside breakout now looking
much more likely, which fits with an inflationary scenario that drives gold
and silver sharply higher.
World leaders have amply demonstrated
over the past year that they are far more scared of deflationary depression
than they are of inflation or even hyperinflation, and since they are not
restrained these days by the inconvenience of a gold standard they can and
will do just as they please which is to take the line of least resistance by
printing as much money as it takes to stave off high interest rates and
liquidity problems, which means that the money supply will continue to grow
exponentially until the entire system explodes and then comes crashing down
in a heap of smouldering ruins. Does this sound alarmist or extreme? - just
remember that this is the logical and inevitable result of politicians'
natural tendency to take the easy and most expedient way out, which is what
enticed them into getting rid of the gold standard in the first place, of
course, that has led to the mess we find ourselves in today.
The situation regarding oil stocks is
more complicated, for here we have to reckon with the potential collateral
damage that might be inflicted by a big drop in the broad stockmarket. On the
positive side, we can see on its 1-year chart that the OIX oil stock index is
just breaking out upside above the resistance at the top of a broad trading
range that started to form nearly a year ago, a development that probably
presages an oil breakout to the upside. Moving averages are now in bullish
alignment, which helps, although the index is clearly rather overbought at
this point, which won't necessarily stop it from advancing. If oil does break
out upside soon as expected, then we can expect the oil stocks indices to
continue to advance and very possibly accelerate.
However, a complicating factor is that
oil stocks would almost certainly suffer collateral damage in the event that
the broad stockmarket drops significantly. Many investors and traders are
expecting a reversal and steep drop in the broad stockmarket, especially as
October is just around the corner, but maybe they are worrying needlessly -
for the same logic that dictates the ongoing ramping of the money supply
worldwide to keep the forces of deflation at bay, also dictates continued
bullmarkets in gold, silver, oil, commodities generally, stockmarkets and
pretty much anything else that pieces of paper can buy. In any event holders
of oil stocks can protect themselves from the damage that a potential drop in
the broad stockmarket might inflict by the simple expedient of closing out
positions should the OIX oil stock index drop below the trendline support
shown on our chart on a closing basis, or (a little lower) below the zone of
support also shown, which was resistance until recently. With this safeguard
in place it is in order to go long the better oil stocks here.
Clive Maund
Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com
Also by Clive Maund
Trading the precious metals and Energy
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