How to Read the Signs of Change—Trend Change, That is… (Part 7)

03/24/2009 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Let's see what the markets had in mind for crude oil in the second half of 2008 and early 2009.

Crude oil prices sold off hard from their $148 highs. At first, the selloff came in a series of cascades lower, but in September 2008, price broke below a base line at $110 barrel and left a lower base line at $90 a barrel. Simply put, these two base lines held the future of the price of crude oil. If crude prices broke and held above the base line at $110 a barrel, a new uptrend would be underway, but if prices broke and held below the base line at $90 a barrel, a sharper selloff would commence. The decision that price had to make was marked by these two base lines and the outcome would turn out to be the major change in behavior in this market.

Looking at this chart, you can see that the downside selloff was as severe as the rally higher was sharp. On the way down, every swing low left by price was easily broken, and all the swing highs held as resistance while price remained in a strong downtrend. The price of crude oil fell in a near vertical fashion from $110 a barrel to $35 a barrel.

chart

Crude oil prices are now trading in a consolidation pattern. After such a strong vertical move, price is restoring its energy while trading in this range between $35 a barrel and $50 a barrel. I note with interest that crude oil has had a number of higher weekly closes, but this is not a change of behavior. There simply isn't a clear sign yet that oil is going to break out of this range to the upside or downside. Price will tell us when it has begun its move by showing us a change in behavior.

Let's now analyze US dollar performance in recent years and see what the future may hold for the dollar.

More in Part 8 tomorrow…

Timothy Morge

timmorge@gmail.com
www.medianline.com
www.marketgeometry.com

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