Our story so far: Several weeks ago, we noted that Oil was potentially topping in the $57 – 59 area. Our concern was that a small
counter-trend rally in oil might trap investors into thinking the run was over.
If Oil resumed its prior trend, the unwary might find themselves trapped.
Since then, events have been unfolding as if according to a
script. Even our previous expectations of Oil entering a “Stupid phase” have been rewarded when a competitor projected a possible
“super-spike” to $105.
We find this extremely Crude scenario wanting in analytical
rigor. Barring an unpredictable external event (i.e., terrorism or an invasion
from Mars), we seriously doubt that Oil could reach that level on its own. Why?
About halfway there, the high price of energy would grind the global economy to
a full halt. If $55 oil is a drag on the economy, then prices some 50% higher -
$75 to 80 – would act as a financial parachute. The deadweight economic drag
would reduce demand to the point that Oil prices would beat a hasty retreat
from those levels.
Regardless, we find it prudent to war game scenarios that
disprove our thesis. Not as an act of contrition, but as a way to validate or
disprove our expectations. Previously, we noted 3 ways that could happen:
1) a faster than expected sell off, reaching
very oversold conditions;
2) a break out to the upside over March 7 highs on
3) a series of improving economic data showing inflation free
A fourth signal would also make our Bearish posture
unwarranted: William O’Neil’s Confirmation day.
We find it a reliable way of telling when a sell off has
been exhausted and broken. O’Neil noted the significance of days when the
Markets “follow-through” with a strong rally (up 1-2% or greater), on better
than average volume. This confirmation day ideally shows up in the 4th through
7th day following the first day of higher trading (post-reversal). The big
rally last week was on Wednesday, so we are now on confirmation day watch, from
Tuesday (4/5) until next Monday (4/11).
Barring a big follow through day, our Bearish expectations
remain. Perhaps oil rallies to the high end of our price range ($57 – 59), or
even surpasses it slightly. Beyond that, however, we are most doubtful, as
Crude is becoming an increasingly crowded trade.