20 May 2009

Technical Analysts Think Oil Could Drop from $60 to the Mid-$40's

Oil may drop from $60 down to the mid-$40's, according to technical analysts at Citi.

That would certainly benefit my DUG calls. And that's why I'm going through the rigamarole of posting this story and creating the chart below.

Margot Habiby at Bloomberg filed the story. Here's an excerpt:

Crude oil prices may fall to the mid- $40s, after failing to sustain a move above $60 a barrel last week, according to Citi FX technical analysts.

Oil’s rally stalled at a six-month high of $60.08 a barrel on May 12, after rising 79 percent from a low of $33.55 three months earlier. It also failed to break $60 in a 4.8 percent rally yesterday.

“Crude faltered at the psychological $60 level, and momentum has turned down, suggesting the danger of a shorter- term correction,” said Tom Fitzpatrick, chief technical analyst at Citi FX, part of Citigroup Capital Markets in New York, in a report co-written with London-based analyst Shyam Devani.

Oil has “good support” at $54.50 to $55 a barrel, in line with the futures contract’s high of $54.66 a barrel on March 26. Further support lies at $50 to $50.50 a barrel, a range that encompasses crude’s highs in December and January.

The Bloomberg story did not provide an annotated chart, so I crafted one:

Granted, the price of oil does not correlate with the price of the Dow Jones U.S. Oil & Gas Index, the index underlying the DIG/DUG duo. However, the price of oil is a decent proxy for providing supporting evidence for my trade.

If oil falls to the $55-level, DUG should move up to $21-$22. If oil breaches that support level and falls to the $49-level, DUG should move up to $25-$26. If oil were to fall to the mid-$40's, DUG could shoot up to $28-or-more.

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