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When Crude Oil Finally Falls, Here's What to Do...By Jeff ClarkThursday, July 3, 2008 The stock market rallies when oil falls. When oil rises, it goes down.
Oil spiked higher by over $3.00 per barrel during the last hour of trading yesterday. The Dow Jones Industrial Average responded, dropping by 166 points and closing at a new low for the year.
Yes, stocks are oversold. Investor sentiment – normally a terrific contrary indicator – is as bearish as it has been all year. Dozens of technical indicators are screaming that the market should be near a bottom.
None of that matters. Oil is the only indicator to watch right now. When oil finally puts in a short-term top and starts to head lower, the bottom will be in place for the stock market. By the looks of the following chart, it may happen soon...
.gif) Oil is tracing out a bearish rising wedge formation. Most of the time, these patterns break to the downside... and the fall is often swift and severe.
Of course, oil has been in this pattern for the past several weeks and it still refuses to fall. Notice, also, that the chart still has some room to move higher before hitting the resistance line at about $152. So, we can't get too bearish on crude just yet.
Now take a look at the chart of oil's Moving Average Convergence Divergence (MACD).
The MACD is a measure of the strength or weakness of a trend. When a trend is strong, the MACD will make new highs (or new lows) as the stock makes new highs (or new lows). If a chart makes a new high but the MACD fails to do so – which is the case with oil right now – then we have a "negative divergence." This is an early warning sign the trend is about to reverse.
I've been bearish on oil for the past couple of months... and, I've been wrong. But I haven't been wrong about oil stocks.
Oil stocks in general are actually lower today than when I made the bearish case for them back on May 1st. That's a little surprising given oil is up over $24 per barrel since then.
This divergence between stocks and commodities is another reason to expect oil to reverse sometime soon. Oil stocks almost always lead the price of oil itself. Since stocks have fallen sharply over the past month, a fall in crude can't be far behind...
And, when crude finally falls, it'll be a good time to jump back into the stock market.
Best regards and good trading,
Jeff Clark
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