(HO) Scale Still Key in Navigating Heating Oil Peak/Reversal Threat

Technicals, April 13, 2012; 6:55am

To this point the decline in heating oil prices from 24-Feb's 3.3130 high is only a 3-wave affair as labeled in the daily log close-only chart below. And the fact that this slide has thus far stalled at the exact 38.2% retrace of Dec-Feb's 2.7804 - 3.3130 rally may contribute to a bullish count that would content that Tue's 3.0957 low completed a correction and that the major advance is poised to resume.

Contesting this bullish count is the simple fact that by virtue of late-Mar/early-Apr's break below 06-Mar's initial counter-trend low at 3.1882, the new long-term trend has been exposed as down. As a result of early-Apr's resumed weakness, the market has defined 02-Apr's 3.2496 high as the corrective high and risk parameter this market is now obligated to recoup to break this developing downtrend, confirm the sell-off attempt from 3.3130 as a 3-wave and thus corrective affair, and resurrect the major bull. In lieu of such 3.2496+ strength, the longer-term trend has to be considered down with former 3.17-to-3.19-range support considered new resistance.

The past six weeks' erosion becomes even more compelling as part of a broader peak/reversal process when one considers the market's rejection thus far of 3.32-area that capped this market as a major resistance a year ago. Combined with recent and historically extreme levels of bullish sentiment that have warned of and accompanied significant peak/reversal environments in the past shown in the weekly log chart below, it's not hard to envisage the past six weeks' erosion morphing into a major decline as long as the market now sustains its losses and developing downtrend below recent corrective highs like 3.2496.

From a shorter-term perspective however, the 240-min chart below shows the market's break yesterday above Wed's initial counter-trend high at 3.1326 that confirms the short-term trend as up. As a direct result of yesterday's resumed gains, the market has defined yesterday's 3.1033 low as the latest corrective low and tightest risk parameter it now is required to fail below to jeopardize the impulsive integrity of the developing recovery, render the recovery from 3.0796 a 3-wave and thus corrective structure, and re-expose the larger-degree developing downtrend.

The old adage about "the trend is your friend" is generally considered a simple no-brainer for most involved in the markets. But when relying on this very simple but very effective trading and technical discipline, it's crucial to keep scale in mind. And the current heating oil market is an excellent example of one in which the short-term trend is up and the long-term trend is down, with clear, objective risk parameters needed to break these trends at 3.1033 and 3.2496, respectively.

In sum, while shorter-term traders with tighter risk profiles are advised to pare or neutralize bearish exposure as a result of the market's proof of short-term strength this week, a generally bearish policy remains advised for longer-term players with strength above 3.2496 required to negate this call and re-expose the long-term bull. Weakness below yesterday's 3.1033 short-term risk parameter is needed to arrest this recovery attempt and define it as an interim corrective pop within what we believe is a longer-term peak/reversal environment that could produce major losses in the months ahead.

< Back to Articles & Videos
< Back to Articles & Videos



Tweet