Technicals | Aug 11 2010
By Rudi Filapek-Vandyck
Some hedge funds closely watch crude oil futures to gauge the direction of the US share market. The reason why should not surprise anyone as a growing number of market analysts has come to the conclusion this past year or so that crude oil is at least as much about global sentiment as it is about market fundamentals.
Just as analysts at GaveKal. They recently conducted their own survey into this matter and ended up concluding that, more so than at any other time in the past, financial investors are determining the direction of the price of a barrel of crude.
This then immediately explains why the above mentioned hedge funds are keeping a close watch on what's happening with oil futures. It's all about gauging underlying market sentiment.
Market opinions remain divided about what exactly happened during the June-July-early August rally, but fact is West Texan Intermediate all of a sudden was priced well above US$80 per barrel again, short covering or no short covering involved.
And while bullish commentators, such as Barclays Capital, continue talking about supportive market fundamentals in combination with crude oil prices becoming more comfortable inside a price range above US$80/bbl, many others are not so certain about this.
Among the dissenters are technical analysts at Barclays Capital (whom are different from those analysts who only view the market from a fundamental supply-demand-inventories-risk premium perspective).
Those technical analysts believe crude oil has shot up too high and internal market signals are pointing towards a weaker outlook for crude oil futures. As signaled in the opening sentences of this story, the importance of this view -if accurate- might extend beyond the oil market in itself.
Of course, the fact the local share market in Australia looks pretty weak this week only adds to what might be an emerging picture of renewed underlying weakness.
Sticking to oil, market technicals suggest crude oil futures have put in a peak, for now, and thus lower prices should be expected, argue the said technical analysts. They suggest the market's focus is about to turn to the month-long trendline support at US$78.39/bbl. Expecting this support to eventually give in, the analysts suggest the price fall might extend into the US$76.00/bbl area, which marks the July lows.
Interestingly, they also see technical signals that gold should start weakening again too. The technical analysts suggest further weakness for gold is unlikely to extent below US$1180/oz, and will likely be short-lived.
