Crude Oil: Head and Shoulders?

[ostap]

The Oil Chart and Rorschach Inkblots

From time to time, technical analysts point to chart patterns in non-storable commodities. Right now, apparently, a head and shoulders pattern in crude oil can be observed on a monthly chart. Will the oil price go down now?

Maybe, maybe not. But what’s for sure is that applying technical analysis to spot prices of non-storable commodities, such as oil and gasoline, is a questionable thing to do.

Technical analysis is based on psychology, namely on greed and fear. It can thus only work on markets where speculators are active, who act on greed and fear. It is the speculators’ greed and fear which are responsible for most chart formations, and probably their belief in these chart formations which makes technical analysis an interesting tool.

Speculators are only active on markets for storable assets, such as stocks, or storable commodities, such as gold. There are no speculators on the spot markets for oil and gasoline. No speculator supplies these products, and no speculator takes delivery of these products, because they are basically not storable. Speculators in energy are only active on the futures market.

Neither fear nor greed do affect the decisions of consumers and suppliers of oil and gasoline. Irritation at high gas prices will not result in chart patterns, and neither do refinery bottlenecks or hurricanes care about moving averages. Thus, a head and shoulders formation in oil says probably more about the psyche of the analyst than the future direction of the oil price.

From: www.economicreason.com

[Spartacus]

Re: Crude Oil: Head and Shoulders?

There may be some ta practitioners who use psychological reasoning. Prechter may be one, although I could never tell if he was fitting his charts to his socionomic theories, or vice versa, and retro-fitting or post-facto rationalizing both the chart analysis and the psych/sosh theories ("recounting my waves") every time the market went against him.

When I studied TA psychological reasoning was rare - even "real" statistics or engineering-inspired signal analysis techniques were rare, mostly it was just

"in the past when you see yyyy formation, xxxx happens"

The Oil Chart and Rorschach Inkblots

From time to time, technical analysts point to chart patterns in non-storable commodities. Right now, apparently, a head and shoulders pattern in crude oil can be observed on a monthly chart. Will the oil price go down now?

Maybe, maybe not. But what’s for sure is that applying technical analysis to spot prices of non-storable commodities, such as oil and gasoline, is a questionable thing to do.

Technical analysis is based on psychology, namely on greed and fear. It can thus only work on markets where speculators are active, who act on greed and fear. It is the speculators’ greed and fear which are responsible for most chart formations, and probably their belief in these chart formations which makes technical analysis an interesting tool.

Speculators are only active on markets for storable assets, such as stocks, or storable commodities, such as gold. There are no speculators on the spot markets for oil and gasoline. No speculator supplies these products, and no speculator takes delivery of these products, because they are basically not storable. Speculators in energy are only active on the futures market.

Neither fear nor greed do affect the decisions of consumers and suppliers of oil and gasoline. Irritation at high gas prices will not result in chart patterns, and neither do refinery bottlenecks or hurricanes care about moving averages. Thus, a head and shoulders formation in oil says probably more about the psyche of the analyst than the future direction of the oil price.

From: www.economicreason.com

[flow5]

Re: Crude Oil: Head and Shoulders?

Oil's certain to resume its climb in Q3 (if a falling dollar doesn't force it higher earlier).
Bernanke has resumed the tight monetary policy initiated when he was sworn in.
Sandwiched between the 2 periods of tight money was a 3 month period of easy money.
This started another price spiral from a higher plateau (beacuse of the RBD).
Bernanke's sure to stay the course now.