A Contrarian Trade Idea for Summer Oil

04/15/2011 5:00 am EST

Focus: COMMODITIES

Don’t bank on the traditional summer oil price spike, writes one trader, citing the already overheated nature of the oil market and likelihood for a move back toward lower daily and monthly support levels.

The move from mid-February lows at $88+ to the mid-April highs over $113 represents a $25 increase in crude oil futures.

That might be a little on the overextended side, especially considering the entire trading world thinks it should reach $120 or higher straight up the ladder without pause. There’s nothing like a tremendous bias to one side to ensure that move never happens!

On the technical side, here’s what we’re looking at in terms of simple support and resistance on a daily chart:

chart
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Looking only to the areas of support, both the horizontal and upward trend lines point to an area of support in the area of $108. Monday's 521-cent pullback was exactly that—just a pullback to support.

The entire trading world (or at least those who chart technical analysis) is watching those two trend lines, horizontal and vertical alike.

Price above each remains bullish until proven otherwise, while below is bearish on a trend basis.

West Texas Intermediate (WTI) crude oil might get a little choppy as price works itself out in this area. A break below the $108 zone and a quick lift back up that stalls into the current support would be a trend sell signal to take and hold until the next area of support right around $103.

On a weekly chart, we see this:

chart
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The weekly chart shows lower support(s) coming into play near $100 to $102+ on the congestion peaks from late 2009 to early 2010 and then February-to-March 2011 once again. Below that would be a return to the lower $90’s zone if the downside move does not hold the $100 levels.

Crude oil futures, be that WTI or Brent-type, are obviously the fixation of traders and the general public alike right now. 

Whereas the prices of gold, silver, and currency markets do not affect people directly on a daily basis, the price of oil and its distillates has an immediate and visible impact on everyday life.

Recent price spikes may be way ahead of the demand curve, and demand destruction from consumers balking at rising gasoline could be the dose of reality to shock price action back down to where it came from. If so, we may not have that traditional summer spike everyone is anticipating.

By Austin Passamonte, independent active trader

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