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March 4, 2012

Stalking the Next Opportunity in Oil

Roughly every 6 to 8 months, oil sinks into a significant low. These declines consolidate the gains of the previous cycle and serve to reset sentiment to a point that allows the next bullish phase to develop. Through this past week, oil's current rally... coming out of the early October low... is five months old, so the likelihood of seeing price roll over and head for the next cycle low is growing quickly. In fact, the strong bounce by the dollar into the end of the week strongly suggests the current cycle peak may lie behind us rather than ahead.

DX Weekly

The dollar's daily and weekly cycle counts, as well as sentiment readings, also support the notion of a dollar rally. If last week's reversal manages to follow-thru, crude oil is likely to hit the skids for a few weeks. As with the dollar, sentiment under crude supports the notion of a cyclical turning point.

Oil Weekly

As discussed in the Member Letter, an intermediate cycle decline almost always entails a failed daily cycle, which is to say a daily cycle that falls below the previous daily cycle low. The current daily cycle kicked off in early February at just over $95/bbl, so there is a strong chance to see oil price work its way below $95 before a low is printed. As I remain strongly bullish on crude over the next couple of years, I will view that low as a screaming buy. In the meantime, we simply need to exercise patience in order to astutely identify the low when it comes.


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