Thursday, May 3, 2007

At The Crossroads: OIL and COPPER

Have you looked at the daily charts for OIL and Copper lately? Both are at a crossroads that may prove ultimately bullish for the Precious Metals. Quite possibly the oldest and simplest of trading signals is now present in both of these important commodities. And both OIL and Copper have often lead the Precious Metals hire [and lower] over the entirety of their secular bull market to date. I'm talking about the 50/200 day Moving Average Crossover. "Investors" swear by this technical trading signal when deciding to go long or short a market.

Let's read some background on this popular trading signal and then we'll look at the charts I've posted to "get the picture". For some background we'll use a

T e c h n i c a l A n a l y s i s T u t o r i a l by Alan Farley I found at To read the entire tutorial:

Moving Average Crossover
Moving averages emit vital market data, but all of them exhibit one common limitation: They lag current events. By the time a 20-bar average curves upward to confirm a trend, the move is already underway and may even be over. While faster incarnations (such as exponential averages) will speed up signals, all of them ring the trading bell way too late.

Multiple moving averages overcome many flaws of the single variety. They're especially powerful when used in conjunction with price patterns. For example, pick out a long-term and a short-term average. Then watch price action when the averages turn toward each other and cross over. This event may trigger a good trading signal, especially when it converges with a key support or resistance level.

Crossovers mark important shifts in momentum and support/resistance regardless of holding period. Many traders can therefore just stick with the major averages and find out most of what they need to know. The most popular settings draw charts with a 20-day for the short-term trend, a 50-day for the intermediate trend and a 200-day for the big picture.

Long-term crossovers carry more weight than short-term events. The Golden Cross represents a major shift from the bears to the bulls. It triggers when the 50-day average breaks above the 200-day average. Conversely, the Death Cross restores bear power when the 50-day falls back beneath the 200-day. The 200-day average becomes major resistance after the 50-day average drops below it, and major support after breaking above it. When price gets trapped between the 50-day and 200-day averages, it can whipsaw repeatedly between their price extremes. This pinball action marks a zone of opportunity for swing trades.

Please click on the charts to enlarge.

After marking lows around 51 in mid-January, a very bullish trend reversal occurred amidst superior bullish divergence in the RSI and MACD indicated by the red trend lines on the chart above. The ensuing rally off that low has been powerful. After knocking down resistance at 62 / 64 in late March, OIL needed time to rest and consolidate it's impressive gains...and wait for it's 50 day moving average to catch up to it. Today it sits on the launch pad: OIL's 50 day moving average is just 11 cents below it's 200 day moving average at the close on May 3, 2007. "Investors" will be watching OIL closely over the next several days. My posts yesterday with regard to the supply / demand fundamentals of OIL leave me with little doubt as to the ultimate outcome of this impending 50/200 day Moving Average Crossover. The chart at this link will give a bit of historical OIL price data that is quite eye-popping: Oil tends to go only one way between June and August year in and year out -- UP!

After marking lows around 240 in early February, a very bullish trend reversal occurred amidst very bullish divergence in the RSI and MACD indicated by the red trend lines on the chart above. Just like OIL, the ensuing rally off that low has been very powerful. Bullish Divergence in the RSI and MACD as they relate to price is one of the most powerful rally predictors in technical analysis in any market. Copper took off like a raped ape out of this bottom, stopping briefly to retest the break of the 50 day moving average and again to test it's break of critical resistance at 300. Copper has been all up since that February low, and quite frankly has gotten way ahead of itself. For the past four weeks copper has been resting and consolidating just below it's next major resistance test at 370. Coincidentally COPPER's 50 day moving average has actually just crossed it's 200 day moving average this week as it test this level of resistance. A move through 370 here in conjunction with a 50/200 day Moving Average Crossover could catapult COPPER to new highs this summer.

In conclusion: It is no secret that OIL and COPPER have been pivitol drivers in the Precious Metals bull market that began in 2001. Both have pulled the Precious Metals higher, and both have pulled them lower. Of all the Precious Metals, SILVER is the most heavily influenced by both OIL and COPPER. Could new highs in OIL and COPPER finally catapult SILVER into the $20's? The future may be now...

Silver Resistance: 13.39 / 13.44 / 13.55

Silver Support: 13.30 / 13.20 / 13.10
__________________________________All prices SPOT

Gold Resistance: 681 / 686 / 691

Gold Support: 676 / 672 / 670

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