(CL) Now-Prompt Dec11 Crude Oil Gains Define $85.75 Risk, Expose Pivotal $90.52 Cap

Technicals, October 19, 2011; 7:10am

Yesterday's round of new highs above Mon's 88.40 high in the now-prompt Dec11 futures contract reaffirms this month's developing recovery and, most importantly, leaves yesterday's 85.75 low in its wake as the latest corrective low and tightest risk parameter this market is now minimally required to fail below stem the rally and expose a larger-degree correction or reversal lower. Indeed, the arguable rising-wedge pattern detailed in the 240-min chart below clearly shows that the past week's waning rate of ascent.

It has been our observation over many years that such rising-wedge patterns typically mean one of two things- waning strength that warns of a reversal- and hence the importance of 85.85 as a risk parameter- or a coiling-up ahead of an accelerated continuation of the trend. As we'll show below, the market engagement of what we believe is pivotal resistance from the lower-90-handle warns of an exciting result in the period immediately ahead. And given this market's very positive correlation with the equity indexes currently, probably a similar key directional statement in stocks as well.

There are two main technical factors to be gleaned from the daily log scale chart above- the market's proximity to the extreme upper recesses of the past two months' range and the graph of the crude oil market's very positive correlation (currently) to the S&P 500 market. This chart also marks the (88.22) 38.2% retrace of this year's entire 114.83 - 74.95 decline that is more appropriately shown in the weekly log scale chart below. IF there's a technical condition and place from which this market may be vulnerable to failing and reversing lower, it is from this lower-90-handle-area resistance. With at least the intermediate-term trend as up however, only a confirmed momentum failure below a recent corrective low like 85.75 will threaten the trend sufficiently to warrant bearish/defensive action.

IF, alternatively, this market possesses the developing strength for a major base and reversal, obviously it's gotta go through the clear resistance from 13-Sep's 90.52 high. And such strength will confirm a bullish divergence in weekly momentum that will, in fact, break this year's long-term downtrend and give it all the room in the world to perform; and with it, very likely, the stock market.

In sum, a cautiously bullish policy remains advised with weakness below 85.75 required to threaten this view enough to warrant moving to a neutral/sideline position in order to circumvent the depths unknown of a larger-degree correction or reversal lower. In lieu of such sub-85.75 weakness, further gains remain expected with 13-Sep's 90.52 high and resistance considered a pivotal trigger to what could be steep, accelerated gains immediately thereafter that are likely to be accompanied or caused by significant gains in the equity indexes.