It has been reported that China has moved up a notch to overtake Germany as the third-biggest economy in the world. No one really doubts they are heading to the top. The long term story for commodities is irrevocably linked to this global phenomenon and we are certain that it’s only a matter of time before these fundamentals re-impose themselves upon commodity pricing and that the oil price and commodity prices return to their bull phase.
The old adage “don’t try to catch a falling knife” applies to investors’ attempts to determine major turning points for the markets – we would never do that. The only way to safely negotiate entry is a combination of technical analysis and judicial stop losses. We would say it’s not just the most sensible way, it’s the only way.
We would draw your attention to crude oil’s long-term monthly chart from July 1983, it can be seen that from the all time high set last year, the oil price has fallen 75% and also to the uptrend from the 1999 low. This combination of technical supports is often important and, as potential investors in this sector, we would look for something to happen here.
The first thing that we want to happen, is for the price to stop falling – the falling knife syndrome must end. The next thing to do is bring it into sharper focus by looking at the daily prices and add to the analysis the eight-week moving average. If you look at the 12-month daily chart, you can see that the rally has failed at the eight-week moving average and also formed a short-term double top and may be forming a short term double bottom. In other words, the price of oil might have stopped going down but [at the time of writing] hasn’t yet started going up.
Now we’ve got the possible beginning of a perfect technical situation – the price has fallen to long-term support where it might be in the process of consolidating. If that period of consolidation continues, then an investment opportunity will be forthcoming. We will look to invest in oil related investments as long as the low of $34 is maintained but would abandon the opportunity if the price falls through it. Ideally we would wish this consolidation period to continue for as long as possible.
OPEC will continue to cut supply until the oil price gains traction although if demand destruction in the developed world, particularly in the US, continues as the global economy deteriorates that may take some time.
The gold rally from October’s low remains secure above $800/oz, even above $750/oz. Because of the economic conditions and the outlook for the US dollar, we are confident that gold will be one of the big stories for 2009. We expect gold and related investments to thrive.
• This article was written by John Robson & Andrew Selsby at Full Circle Asset Management, as published in the threesixty Newsletter on 16 January 2009.