Three Winning Plays on Oil

All eyes are on gold, which went vertical last week and is now trading at $1,000 an ounce for the first time since February. As I watch that amazing rally, I wonder if crude oil might be next, given the "pile-in" mentality we often see in the commodity pits. No, the recession doesn't support higher energy prices, but facts and logic haven't held down the precious metals group, have they?

Crude Oil (Light) Futures -- Daily eSignal

Crude oil sold off from $147 to $33 after the bubble burst last year, dropping the commodity to a four-year low. It bottomed out in December but spent another two months testing the low before lifting higher in February. That bounce mounted the 200-day moving average, with the rally adding another 11 bucks and then stalling in June.

As I pointed out in an August column, many equities lifted into this long-term moving average during the initial phase of the recovery and then tested the level for up to three months before confirming support with a breakout or rolling over in a breakdown. Crude oil is grinding through its own testing phase right now.

The moving average has provided a platform for this consolidation pattern while the contract has posted a series of higher lows (red circles). Price lifted over resistance at $74 two weeks ago, but the rally stalled and gave way to another pullback. Selling pressure is now washed out, indicating the instrument might be setting up for another breakout attempt.

Given growing strength in other commodity markets, this breakout could "stick" and draw in worldwide momentum capital. It also might lift the rising contract above a key inflection point (blue circle) defined by the convergence of the 38% selloff retracement and 2006 swing high near $80. The character of the crude oil uptrend could change dramatically if it rallies above that key resistance level.