Oil ready to bounce higher

Oil looks set to challenge its 2008 highs, setting in place the ultimate top for oil [July highs] and the end of the cyclical bull market in oil. However, this topping pattern for oil will occur within the context of a secular bull market for commodities. So the secondary push lower, likely to occur in the latter part of the year into early 2009, will provide an excellent buying opportunity as the global economy benefits from the deflationary environment.

As a hypothetical one should watch for an initial move to the the 50-day MA. The nascent rally will probably stall here because of the added supply at this traditional resistance level. A modest retracement down to $120 should see the return of demand and a more forceful challenge on the 50-day MA. This second challenge on the 50-day MA will produce the break and bring the rally to fibonacci retracement levels around June 2008 lows, but with the possibility of extending the rally to around $140. This final push will probably breakdown and start a measured move down; taking oil past 50-day and 200-day MAs and ultimatley down to $98 circa April 2008 lows (perhaps with modest bounces at each of the aforementioned moving averages). From there it could see a sideways trading pattern knocking between $95 and $145 for a couple of years as the global economy finds its footing - thereby ending the cyclical bear market.

Get the Fallond Newsletter

Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts and stock charts website