Crude Oil has broken below its long-term uptrend line

Crude oil has broken below its long-term uptrend line, which started in August 2003. The long-term uptrend line support is at the USD60.00 level. At 23.00 GMT, Crude oil is trading at USD58.40. At this level, it is about 2.7% below the long-term uptrend line and a swift recovery is necessary within the next day or two, failing which Crude oil's uptrend is over!!!

















Chart 1: Crude oil's monthly chart as at September 29

From the above monthly chart, you can see the long-term uptrend line, which is denoted here as AA. The uptrend line was tested once in September and Crude oil re-bounded to USD63.80. But, the re-bounce could not sustain & yesterday, Crude oil broke through the uptrend line.

The signs were there that a severe test of the long-term uptrend line was about to come. From the weekly chart below, you can that the Bollinger Bands were diverging (area shaded blue & marked as ‘B’) instead of converging (area shaded yellow & marked as ‘A’). This means that the selling might not have exhausted yet.
















Chart 2: Crude oil's weekly chart as at Oct 4 (overlaid with Bollinger Bands, Parabolic & Slow Stochastic)

We will have to wait & see how Crude oil perform over the next few days. A convincing break of the long-term uptrend line would certainly lead to benefits to the economy & the stock market. Nevertheless, we have to be watchful of surprises similar to the Amaranth blow-up because a lot of hedge funds had piled into the Crude oil rally in the past few months. A few disasters like Amaranth happening simultaneously could seriously affect the market. You may recall my comment sometime back about excess kurtosis or ‘fat tails', where destructive market events occur. Well, this scenario may play out here. Hopefully, not.

Note:

The Amaranth debacle happened when the hedge fund's heavy bets on Natural Gas went badly wrong. You can read about it here, here & here.