Is The Oil Price Due A Correction?

Crude oil has been making new daily highs as traders react to anything from the weaker Dollar to voting on Strictly Whatzitname. But the chart is starting to flash warning signs.

Crude oil continues to make headlines with a $12 rise in October taking the price above August’s highs. This latest rise has been attributed to the weaker Dollar, stronger US earnings, optimism over the global recovery and just pure speculation; take your pick.

While those with cool heads mutter about spare capacity, low margins on refining and lacklustre demand, the more excitable element point out that a rise above $80 will provoke a further options-induced rally.

The daily chart is displaying all the usual bullish signs; rising 21-day moving average and Parabolic SAR, RSI at 70 and a very positive MACD. However, I wouldn’t be a buyer here, and I think there are a few early warnings that the move is over-cooked.

The daily candles have been getting smaller, and today’s is currently showing a doji reversal warning (though this could completely change if the US reacts well to today’s improving corporate earnings). There’s a pretty big gap between the price and the supporting 21-day MAV; the RSI at 70 doesn’t leave a lot of room, and today’s MACD hasn’t matched yesterday’s enthusiasm.

These signals aren’t strong enough for me to open a short bet, but if today closes with a doji candle I’ll be looking for a lower low tomorrow as a reversal sign. First target looks to be August’s high of $75.96; after that I see support at $73 and key support at the 21-day moving average.

Having said that, I’ve warned that this week will be hugely driven by US earnings; if they continue to please then we could see more of the familiar pattern of higher equities and commodities and a lower Dollar.

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