As an investment professional and especially as a technically oriented trader, I have the right — or more accurately, the obligation — to review my theses on a daily basis. As such, since I last shared my vibes on the price of oil on March 1, the commodity has acted as suspected and risen higher. That gives me cause to review what’s happened, and also take a look ahead to see what’s next.
Let’s walk through through the charts of oil, taking into consideration the all-important dollar index and seeing what might be in store for this summer’s driving season.
From a longer-term point of view, not much has changed for the price of crude oil as it remains trading in a narrowing multiyear trading channel.
Also through a longer-term lens, oil and the U.S. dollar tend to move inversely, and thus have a tendency to mean-revert. While that’s nice to know, more important is the timing of a mean-reversion. Given the difficulty of forecasting such a thing, I find it easier to focus just on the general trends of the dollar index for clues.
On the below chart, I plotted the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP) versus the United States Oil Fund (NYSE:USO), which brings to daylight the recent divergence between the two.
The chart of UUP on its own suggests that it’s overbought at current levels and due for a correction, which works well into my thesis of a narrowing of the spread between the dollar index and oil.
On March 1, I discussed the below daily chart of crude oil futures, as the price was hanging at a critical intermediate-term level near $89.50-$90.50. The support area was/is made up of 50% Fibonacci support from the November 2012-February 2013 rally. Furthermore, the support area was smack in the middle of the broader trading range highlighted above.
Given that my March 1 musings have come true — supported by technical levels and an overbought dollar index — I continue to favor oil prices rising for the coming weeks (if not months) with a price target toward the upper end of the long-term trading range, near $98.
As a bigger-picture thought, I would like folks to keep the following in mind: Lower oil prices can either serve as a tax cut of sorts (and thus be considered a stimulus), or be a sign of lower growth. Take 2008, for example, when oil plunged … and eventually took stock prices down with it. This was a sign of slowing growth.
In conclusion, the current setup remains favorable for rebounding oil prices over coming weeks and months. This is supported by my analysis above, as well as favorable/rising seasonable months in April and May for oil.
The bottom line is that barring any major sudden weakness in global macro data, oil prices — and thus prices at the pump — likely will be higher than lower this summer.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.