Crude Oil may move sideway for a while

Crude Oil prices have gained nearly 50% since early May. The movement of Crude Oil prices is inversely correlated to the movement of the USD. From Chart 1 below, we can look at the movement of Crude Oil prices (WTIC) & USD index over a 1-year period, divided into 3 phases:

1) From Jul to Dec 2008, USD was rising while WTIC was dropping [denoted as 'A'];
2) After a sharp sell-off in USD in early Dec 2008, USD resumed its uptrend but WTIC traded sideway between USD30-50 [denoted as 'B']; and
3) After that, USD entered into its present short-term downtrend, while WTIC rallied. During this period, USD had a corrective move from end Mar to April 2009 against the prevailing downtrend [denoted as 'C-1'] where WTIC reacted by moving sideway. Presently, USD appears to be in another corrective move against the prevailing downtrend [denoted as 'C-2'], and I similarly expect WTIC to move sideway.

Chart 1: WTIC & USD's daily chart as at 16/6/2009 (Source: Stockcharts.com)

Looking at Chart 2, we can see that WTIC's immediate horizontal line resistance & support are at USD78 & USD68, respectively.


Chart 2: WTIC's daily chart as at 16/6/2009 (Source: Stockcharts.com)

WTIC dropped from its high of about USD150 to its recent low of about USD30- losing USD120 in the process. Applying Fibonacci ratio 38% & 50% for normal retracement of its prior move would mean that WTIC could easily rebound back to about USD76-90. WTIC made a high of USD74 at the beginning of the week. Subsequent weakness in the USD- if it happened further down the road- could cause WTIC to even hit the USD90 mark. From Chart 2 above, we can see that it has strong horizontal resistance at USD86 & thereafter at USD100.

A mild correction in Crude Oil prices should lead to similar correction in Oil & Gas stocks, which have risen handsomely in the past 3 months. If that happened, it would be a good opportunity to buy into this sector which I believe may outperform the general market later on.