What this chart tells me about Crude Oil

Today is a very important day in the life of Crude Oil. The Continuous Contract has fallen to the top of the window (gap) that was created on April 11th when the commodity was able to open around the $71 area and break above three previous peaks formed at $68 and some change.

Yesterday the continuous contract did break below on its’ low, and also closed under, the area at the top of the window. This break below is a violation of the top of the window’s support. However, I view the break as not actionable because it was not by a significant enough margin and the bottom of the window can also serve as support. In addition, a hammer candle formed yesterday. Hammer candles can sometimes be bottoming formations. If the hammer does not prove to be the end of the decline, the next area of support will be the bottom of the window, back to the $68 area.



The question becomes whether or not to go long here (either the commodity or stocks that underlie the commodity) as there is some significant resistance turned support just a little bit lower in price than where we are now and also the fact that the window mentioned above should provide significant support. The proposition is a bit risky as the contract, could, of course, again break through the top of the window (gap), and also break through the support at the bottom of the window ($68). This action would negate the proposed $78/$79 per barrel price objective that I proposed when the gap was first created.

However, the relative strength ratio of Crude Oil Continuous versus the S&P 500 remains firmly in a rising trend. This pullback in the contract, therefore, should be a buying opportunity for investors, especially stock investors. For those of you who buy the commodity directly, I would advise waiting a day or two to just make sure that the support can hold, or, alternatively, be prepared to move quickly if it does not. For stock investors, iShares has come out with two new ways to buy the energy market, (IEO | Quote | Chart | News | PowerRating) (iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund) and (IEZ | Quote | Chart | News | PowerRating) (iShares Dow Jones U.S. Oil Equipment & Services Index Fund). I prefer (IYE | Quote | Chart | News | PowerRating) (iShares Dow Jones U.S. Energy Sector) as there are not enough data points yet on the two new ones for me.





There is some overhead resistance on this chart, but it has pulled back to within only 5.3% of its support line. In addition, its RSI is entering a level of support. IYE is a great alternative for investors who don’t have enough exposure to energy. Buying an index is always less risky than buying an individual stock, but, remember, you will want to have a larger percent of it in your portfolio in order to generate the same sort of effect as owning an individual stock in the industry.