Cloudy Picture for Oil

The price of oil in April 2006 topped out at just over $75 per barrel. Over the next month, it made two more attempts to reach that level again, only to fail. The triple-top failure in the April/May time period had most thinking that was it for the commodity. It would now finally move lower and bring some relief to the world.

They were partially right. Oil did move lower over the next two months, down to $68 per barrel, a 10% correction, which is all it would give. The oil bulls were going to buy weakness and attempt to bring the commodity back up for one more breakout attempt. They succeeded quite nicely taking oil over the $75 triple-top level in early July and carrying it all the way up to its $79.86 peak.

The Bears Take Over

The bulls were now screaming as loudly as they could that oil was destined for $100 on the basis of global situations, such as China's growing demand and worldwide terrorism. Everyone seemed certain of this, and as so often happens when that's the case, that empty feeling starts to set in after some time has gone by and their predictions have not come true.

Well, July was no different, and then two things happened that suggested a top had been made, possibly a very long-term top. First of all, from a technical perspective, the new high at $79.86 was met with a very poor moving average convergence/divergence (MACD) comparison to the previous highs at $75.00, as shown by the downward-sloping red line in the MACD area on the chart.

In addition, it was interesting how many oil sector stocks weren't making new highs while the commodity was. Plus, the combination of the lower MACD and the lower sector stock prices gave the bears hope. And sure enough, the price of oil began a very steep fall at the same time the stock market began its long climb higher. This type of inverse action is very common.

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At the time of publication, Steiman had no positions in the stocks mentioned, although positions may change at any time.

Jack Steiman is president of TheInformedTrader.com, for which he also conducts live seminars, and Steiman New Research Group, LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Steiman appreciates your feedback; click here to send him an email.