Long-Term Uptrend in Oil Remains in Place

Recent calls about the imminent demise of the crude oil rally are premature, to say the least. In fact, the sticky commodity could be trading well above the June high sometime in 2009. So long-term investors who are betting their bankroll on an ignominious end to this secular bull market are likely to be disappointed.

No market can defy gravity forever, and Newton's apple has finally struck crude oil squarely on the noggin. But focusing on short-term price movement in the energy pits is a serious mistake, because the technical forces driving this powerful uptrend are still in place, waiting for the perfect time to reinstate the upside.

For now, however, crude is trading in no man's land where long-term bets on either side of the aisle don't make any sense. It's a conflicted environment, in which bulls will be buying the dips while re-energized short-sellers wait patiently at high ticks to drag down bids to new corrective lows.

Crude Oil, 10 Years

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Source: eSignal

Crude oil started its current journey in 2004, when it broke out above four-year resistance above $37. That historic event lifted price just above the psychological $50 level that everyone thought couldn't be breached without buckling the world economy. The instrument paused there for about six months and then took off in another rally wave.

The contract topped out near $80 in July 2006 and entered the deepest correction in its history. Like now, that decline brought out top-callers who insisted that the final uptick of the long rally has finally been hit. That view became popular and persisted for almost a year before crude oil took off once again and charged above the old high in September 2007.

That breakout marked the first impulse of the near-parabolic rally that characterized this year's amazing run. Notice how few pullbacks, retracements or consolidations took place between January 2007 and June 2008. Clearly, the instrument was long overdue for a major correction.

Crude Oil, Two Years

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Source: eSignal

That welcome event is now under way, with the possibility that things get even nastier for crude oil in upcoming weeks. In fact, it's not unusual for a rally of this magnitude to retrace 50% or more of the last impulse. This proportional dynamic would place a downside target for the current decline near $99, which marks an interesting convergence with the psychological $100 level.

However, it's doubtful that price will drop straight down to that level as we head through the summer. Geopolitics and the hurricane season are certain to interfere and trigger a few rally bursts that attract dip-buyers and other weak hands. This correction might even evolve in a broad declining channel, better known as a bull flag pattern.

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