Stock Market Analysis

Tuesday, July 15, 2008

Oil Shaking...

How do you tell if a price trend is shaking? One of the most reliable way is by observing the frequency of retreat. When a price is in a strong uptrend, it does not go straight up but rather go up and then retreat a little and then up again, making new highs with every upward movement, like a wave. But when that trend is shaky, the frequency of that retreat increases and the length of the upwards movement shortens. Eventually, such a trend stalemates into a neutral trend where every upward movement get matched almost immediately with an equal downwards movement and then a trend change occurs. I think this is what's happening with oil right now. Crude oil price went from retreating once every month since its uptrend begun back in February to retreating twice in a month right now. This is indication that the strong uptrend of crude oil price is now shaky even though it is still intact. Indeed, this shakiness was also confirmed by OPEC's forecast of a lower oil demand going forward. See what happens when everyone conserves energy?

Of course, it is going to take much more than just a single day retreat in crude oil price to turn the stock market around as inflation continue to be a concern. The PPI numbers (see economic calendar) released today indicated that inflation at the producer level is higher than expected, casting a shadow on tomorrow's CPI numbers. Adding to the pessimism is also a weaker than expected retail sales. It is going to take a huge retreat in crude oil price filtered down to lower prices at the pump and switch to make consumers spend like they used to again and bring light to the stock market. For now, the way ahead still looks gloomy with no signs of a reversal on the technical front even though the Dow is already in a deep oversold position.

This is certainly still a risky time to be going long on stocks and if you must, you might want to limit your risk using the Fiduciary Call options strategy.

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