Stock Market Crash! Blog

Is Oil Approaching $82??!!!

There appears to be a potentially bullish chart pattern formed in crude oil since its Katrina-induced high in September 2005. Ominously, the pattern suggests a minimum price target of $82 - a harrowing $12 advance from the current price of $70 per barrel.



The pattern is called an ascending triangle, a type of continuation pattern. Such a pattern represents a pause or consolidation before the market resumes in its previous direction. Read this excellent StockCharts.Com article to learn more.

The beauty of the ascending triangle pattern lies in its ability to provide an accurate price target for the markets' rally, upon a successful breakout from consolidation. You can find the minimum price target by measuring the triangle's vertical distance(in $) at its widest point. This dollar distance is then added to the price where the market breaks out from the triangle. If the market rallies past this minimum price target, you can find a second price target by adding the vertical dollar distance of the previous uptrend to the breakout price of the triangle.

A price target is very helpful as it allows you to assess the risk versus reward ratio for a trade and it indicates a potential exit price, as well. When the market is trading at the price target, one strategy is to place a stop-loss order a few points below the target, helping you to mazimize profits if the market embarks on another leg up. If the target becomes a ceiling, however, the stop-loss order will help you preserve much of the trade's profit.

The vertical distance of oil's triangle is approximately $14, making for a minimum price target of $82 from its breakout at $68. If the market rallies past $82, the next possible target is $92, which was found by adding the previous $24 uptrend to the recent $68 breakout point.

Either one of these afforementioned scenarios will greatly impede the global economy's powerful ascent, the severity of which will be determined by the price target and the length of time oil stays at such a lofty height. There are plenty of catalysts which could cause such a disaster in the next few months:

1) Escalation of the Iran crisis: Can consist of either UN economic sanctions on Iran and/or the West launching military strikes. Either scenario will likely result in Iran shutting off its oil pumps to the West, easily sending oil skyrocketing.

2) Continued strife in Nigeria's oil producing delta.

3) Increased gasoline demand for the summer driving season.

4) Lowered US oil reserves.

Despite the gloomy prediction, there are several ways to profit from oil's rise to $82 or $92. One great option is to purchase shares in Amex's brand-new Oil Fund exchange traded fund. This ETF directly tracks oil prices and is revolutionary because it lets retail investors gain oil exposure without dealing directly in futures or physical commodities.

Another excellent way to profit is to invest in Chinese oil companies, such as CNOOC and PetroChina. Chinese oil companies will rise in lockstep with oil's increase, while benefiting China's astounding 9%-plus GDP growth. Even the world's most successful investor, Warren Buffett's Berkshire Hathaway owns 659,000 shares of PetroChina.

Caveat: This trade COULD go wrong, its just a simple fact of trading life. The best solution is to use a stop-loss order a few percentage points below your initial purchase price. There's no reason to marry a losing position. Simply get out at a small loss, and find another trade. If it's successful, let your winner run by ratcheting-up your stop loss a few percent underneath the price.

Click here to check the updated crude oil chart at StockCharts.com