John: Since we started “Technically Speaking” a few weeks ago, our single market sector focus has been Gold. This sector has seen a rapid rise in the price of Gold over the last few years and the continuance of the primary trend is apparent. As we have seen with BMR’s flagship Gold junior, Gold Bullion Development (GBB, TSX-V), and the trend of the CDNX, this is the time to select a portfolio of juniors as that market appears primed for a bullish move during this second half of 2010.
We are all painfully aware of the economic calamity that affected all countries in 2008-2009 and the devastation to all global stock markets that finally bottomed in March, 2009. Since that time there have been steady improvements in the markets and in most economies but not without a few serious bumps in the road – the European debt problem being a prime example. As we enter the 3rd quarter earnings season, there appears to be an increasing number of large North American companies with larger than expected revenues and profits. This is the underpinning or support investors and the major indices are looking for.
The Dow Jones Industrial Average is considered to be representative of the “Economic Engine” of the United States and of course to run an engine one requires energy, especially in the form of light crude. Thus, we feel it’s prudent at this early time in the recovery process to examine the energy sector – specifically light crude and to look at the relationship between the Light Crude (continuous contract) Index (WTIC), the Dow and the CDNX. There are a lot of junior oils on the CDNX, so some correlation between the WTIC and the CDNX is expected.
The analysis of light crude will be presented in 2 parts. First, a 3-year weekly chart to determine the correlation between WTIC, the Dow and the CDNX. Second, an in-depth technical analysis of the light crude chart.
PART #1: WTIC, Dow, CDNX
The above chart is a 3-year weekly chart comparing the WTIC, the Dow and the CDNX. We see that the Dow and the CDNX started to decline in 2008 whereas the WTIC continued to climb to reach a top of nearly $150/b in July, 2009. From there it declined to a low of $40/b and bottomed along with the Dow and the CDNX during the Nov./08 – Mar./09 period. From there, for 17 months, all three indices have moved in a primary trend together.
We can conclude, then, that under the present circumstances there is a close correlation between the WTIC, the Dow and the CDNX.
PART #2: WTIC Chart
On the 18-month weekly WTIC chart we see that from Oct./09 to the present, light crude has been moving up in a horizontal trend channel (black horizontal lines) between a low of $70 and a high of $87 (balance of analysis below chart):
A long-term support trend line (green) was broken in May of this year and this became a resistance trendline (blue). From that break, light crude has formed an ascending triangle (thin blue lines) with a top line resistance of $79. Light crude is currently trading around this value.
Also shown are two long-term moving averages – SMA(50) and SMA(200). Light crude is trading just above these, providing strong support.
Looking at the indicators:
The RSI is flat but slightly above the 50% level – slightly bullish.
The Slow Stochastics has the %K (black line) above the %D (red line) with both pointing up – slightly bullish.
The ADX trend indicator has the -DI (red line) above the +DI (green line), and the ADX trend strength indicator is low and flat, denoting a low bearish trend.
Outlook: Light crude has a slightly bullish chart pattern but requires an increase in demand to make it break above the $80 level and then to continue through the top of the horizontal trend channel. Until the “engine” demands more fuel, light crude will keep trading within this channel.