3 Charts Tell Future for Heating Oil

02/03/2012 10:48 am EST

Focus: FUTURES

Greg Harmon of Dragonfly Capital explains how three charts of heating oil and natural gas give clues about future price action for the remainder of 2012.

The monthly chart below for heating oil futures shows a year-long bull flag after a two-stage run higher from the 2009 low.

It has a solid Relative Strength Index (RSI) sitting at just under 60, which had been in bullish mode for all of 2011 after crossing through 60.

The Moving Average Convergence Divergence (MACD) indicator has faded and turned negative, which happens in a flag, but the negative turn makes you take notice. It is also sitting between the Median Line and lower Median Line of the Andrews pitchfork.

See related: Pitchforks: A Valuable Trading Tool

chart
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These lines attract the price, and with price currently in the middle, it could go either way. This fits with the ability of the flag to resolve either higher or lower. A resolution higher would have a target over $4.25, and a breakdown would project a target back near $2.00.

The ratio chart of heating oil against the other fuel, natural gas, gives some clues as to how this may resolve. This pair bottomed and has been trending higher since 2003. The RSI is getting very high, though. This could correct through a pullback in the ratio or a through time with a sideways move in the ratio.

chart
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This also applies to how the ratio could correct for being outside of the Bollinger bands, consolidation, or pullback. Either way, it is extended.

The final clue comes from the chart of natural gas itself. It broke down through a 13-year rising trend support line a few months ago and looks to continue lower.

chart
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The RSI is not anywhere near extreme and the MACD is only starting to grow more negative. If natural gas continues lower to support at $2.10 or $1.65, below that, the ratio above could still rise, but that would likely send the RSI near 90 without a correction in heating oil. It is much more likely that heating oil will start to correct lower at some point in the near future.

By Greg Harmon of Dragonfly Capital

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