Another Oil Shock?

FUNDAMENTAL ANALYSIS
The Dow retreated by 104.79 points today as crude oil price continues to rise. In fact, crude oil has topped $118 per barrel today as the continued retreat of the US dollar discouraged any increase in production, forming vicious cycle of price increase. Does this sound all too familar? Yes, this is almost a perfect re-enaction of the 1970s oil shock where oil prices shot as high as 3 times higher on the weak dollar and US economy. HOWEVER, those of you who are aware of that event should know how it ended... yes, they ended in oil gluts where the the demand for oil dropped so drastically that crude oil price have to come straight down. In fact, the rush to the tar pits in Canada for an alternate fuel right now was exactly what happened back in the previous oil shock in an effort to reduce demand on light sweet crude. Examining our situation right now, crude oil is definitely still in hot demand despite an already weak and battered dollar. How will this oil shock end?

Investors also didn't get the optimistic existing home sales number that is so desperately needed to rocket this rally today. March existing home sales continue to drop 2% for a 19.3% drop in the past year. Certainly there are signs of the end of the housing crisis but it is not showing up strongly in the numbers yet. But remember, this is only 1 of my 12 reasons why the market is ready for a recovery. I still believe the fundamentals are in place for a recovery in the stock market but if crude oil were to shoot straight up for the $150 mark, there would definitely be a widespread effect in both the stock market and the economy, so traders still need to be nimble.

TECHNICAL ANALYSIS
We didn't get the strong follow up that we would like to see today but instead, the Dow looks like it has entered the phase of establishing a support level on the previous resistance level of 12750 right now. After a stock or the market breaks a strong resistance level, it would pull back down to that resistance level again in order to establish a support level where that previous resistance level was. This is where we want to see investors buy aggressive whenever that level is reached instead of the previous behavior of selling whenever that level is reached. Aggressive selling or buying at certain price levels are what creates support and resistance levels. This is an equally uncertain and dangerous phase. If it fails to establish a firm support level, it might laspe straight back down below 12750 significantly, making 12750 a resistance level once again. In real life, it means that if investors start selling off once again at around the 12750 level instead of buying into it, we would see the Dow lower once again as the pattern of selling at 12750 returns. For now, we would want to see buying at around this level and the Dow to move sideways along 12750 for a few days in order to establish a support level before rebounding. This will better ensure the sustainability of the recovery.


Dow Technical Chart by Best FREE Software TC2007! Download it for free now!