Sunday, November 23, 2008

Oil: The Model Short

Its somewhat stunning to see the lifeblood of modern society to fall by 2/3 in less than six months, could we have seen it coming? The oil crash of 2008 was a textbook short and gave a number of winning sell signals on the way down. If you are looking for some good signals for trading anything take a look at this chart:

There is still no sign of a bottom in oil but its obviously way too risky to short here. Maybe if oil could manage to rally back up to the 50 dma but thats pretty far off at this point. I have the "ultimate fib" on there, but so far it has not provided any support at $56.50. If oil could recover that level it might be worth watching for a ride up to the 50 dma (~$75), I'm not holding my breath.

For a quick comparisson check out the dow over this same six month time period. There's not a whole lot to say here other than that volume is picking up which suggests some kind of bottom is near. However, after cracking through some major support levels last week its going to be tough for the market to rally without a capitulation event which we just haven't seen yet.

The ideal situation for the dow from my perspective would be a big washout early this week followed by a seasonally reinforced rally into 2008. Perhaps a Citigroup bailout will be the catalyst for a major panic/capitulation next week. Good luck!

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