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
, 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 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.
In addition to technical buy signals driven by a rally over $80, it appears this venue is highly vulnerable to the secret world of high-frequency trading (HFT). As a
The New York Times
noted, proprietary trading shops "masquerading as market makers" may have the power to drive up the crude oil market simply for personal profit.
Are you worried these folks have moved on to the precious metals pits, providing the unusual firepower for the recent gold breakout? I think you should be. In any case, they're still out there, with the power to trigger economy-shattering parabolas or crashes on relatively few transactions, while old-fashioned types debate fundamentals, value and other outdated notions.
Of course, it's our job to make money, regardless of the hidden reasons for market movement. So how can we benefit if crude oil takes off and heads toward $100? It isn't an easy question, because underlying equities -- at least those represented in the
Oil Services HOLDRs Trust
-- don't show low-risk buy patterns yet.
This fund posted a recovery high at $116 in June and pulled back. It found support near $87 and jumped back above $100. Price action since that time has been volatile, with a brutal megaphone pattern (blue lines) that's carving out higher highs and lower lows. Until this roller coaster finally stops, I wouldn't touch this instrument with a 10-foot pole.
However, it's a different story with independent oil companies, as well as smaller-cap energy exploration companies. Many of these lesser-known issues are moving higher in strong uptrends, attracting retail speculation and institutional interest. Here are three of my favorites:
( BEXP) bottomed out in March. It rounded out a basing pattern (blue line) with resistance near $4.25 and broke out in July. The stock lifted to a 10-month high last week, posting strong volume. Look for the uptick to pause below $10, move sideways for a few weeks, and then rally into the low teens in the fourth quarter.
ATP Oil & Gas
( ATPG) dropped like a rock in the last bear market, losing more than 40 points before bottoming in February. It rallied above May resistance last month and eased into a springboard pattern (gray box) near $11.50. The stock rallied out of this base and is now trading at a 10-month high. I'm looking for the uptrend to stall near $15, enter another consolidation phase and then rally into year-end.
Key Energy Services
also bottomed out in February. The recovery stalled near $7 in May, but buyers returned in early August and lifted price to a nine-month high at $7.56. The stock pulled back for another two weeks and broke out on Tuesday. This price action sets up ideal conditions for a continued uptrend that could push the stock into double digits in the fourth quarter.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
, a premium product that outlines his charts and analysis. Farley has also been featured in
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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