The rising price of crude oil to date has had a somewhat limited affect on the economy ( so far) but my overall analysis of the crude oil chart says to me that there is still plenty of bullish potential for the intermediate and longer term time frames.
Certainly it seems somewhat odd that the S&P 500 is near all time highs while crude oil is also hitting record highs at about the same time ( Gold may soon do the same but will be analyzed in a future posting). According to my previous posting ( The S P 500 will break to new all time highs ) the S&P 500 will eventually break to new all time highs joining the crude oil run.
Traditional wisdom would suggest that crude oil and gold at new all time highs would suggest a weak economy or inflationary concerns. The inflationary bite has not really been seen yet in my opinion. There is plenty of anecdotal evidence to suggest that increased inflation is here and that it is growing, but to my knowledge, so far anyway we do not have a situation of run away or a really “painful” inflation situation.
Perhaps what we are dealing with is the old ‘frog does not notice the water is boiling analogy until it is too late’. This could be the case. It could be that by the time the public and the investment community at large realizes that inflation is a very bad problem it will be too late.. and the effects will be large enough that they are seen obviously everywhere.
I will tell you what the crude oil chart is telling me from my experience and observations. Number one, the overall trending pattern since 2001 is of a parabolic arc symmetry. What this means is that as time moves forward price subsequently rises at a faster and faster pace until you come to the point of almost zero price declines. In other words, it looks like crude oil wants to take the path of a parabolic blow off with eventual near vertical price rises until it exhausts itself. Since about mid 2004, the price of crude oil has chosen to build a rising wedge price formation which is a price consolidation pattern. So even though the price of crude oil has recently hit an all time high, the current price is still contained within this rising wedge formation. This suggests to me that we are likely due for some sort of pullback into the rising wedge range at this time. However if the crude oil chart elects to break out and upwards (green arrow) out of this rising wedge it could lead to a very fast straight line bullish move.
I have discussed rising wedges before and they are somewhat of a tricky price pattern. The normal thinking is that they are temporary bearish patterns and not necessarily ‘end of bull market’ patterns. They have a bearish tendency because you have a combined situation of diminishing price appreciation and constricted price range both of which indicate less demand.
However, rising wedges can fake you out and also be very bullish. They show this bullishness when price breaks out upwards over the top resistance line. So the exact opposite message is being sent, one of extra strong bullishness.
The price of copper has also exhibited such a rising wedge pattern as I pointed out in commodity copper shows good technical analysis trend. The copper price is starting to break out of that rising wedge however further confirmation is needed.
Time wise, this rising wedge in crude oil could extend all the way out to January 1st 2006, but the jury is still out on how long it takes to make its decision.
Crude oil at new highs, the S&P at new highs, and gold at new highs…
Honestly…
Can it get any crazier than that?
Thomas.