With the increase in unrest in the Middle East, specifically Egypt, we have seen a spike in oil prices. We are now back above $100/barrel oil with last week’s 7.3% advance.
Black gold, as oil is often called can have large swings when traders become nervous of potential military coups and fighting in oil-rich countries spooks commodity markets. The last thing anyone wants to see is the global oil pipeline choked as instability spreads.
WATCH THE TRENDLINE
With the big move last week we now have an interesting chart setup in light crude oil ($CL_F). As the chart below shows, we are testing the falling trend line off the 2011 and 2012 highs. If this trend line is unable to hold then the next stop on the higher gas prices trade could be $110 – the previous high from March 2012.
MOMENTUM READINGS
The closely followed commodity also has an overbought Relative Strength Index which traders may need to work off to keep momentum healthy and supportive of the current up trend. We’ll be looking for the RSI indicator to hold around the 50 level to keep the bullish momentum theme going.
CHECK OUT THE OVX
What’s interesting about this rise in crude oil is what has taken place in crude oil volatility, which we can see in the bottom panel of the chart. Like the more popular S&P 500 Volatility Index, when prices rises volatility moves in an inverse fashion and falls. Currently the Crude Oil Volatility Index ($OVX) has been putting in higher lows right alongside crude oil prices. Does this mean option traders don’t trust the advance in price as they buy more puts to protect from a fall in oil?
BOTTOM LINE
Going into this week I’ll be watching to see how crude handles this trend line resistance and if oil volatility continues to mirror the price action of the commodity. Also don’t forget that news out of Egypt or any other major oil producing country is likely to have an impact on oil price action.
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
