The volatility in oil prices has been significant over the past year. These last few weeks has actually seen a lot less volatility almost the “calm before the storm.” Oil prices, as with all commodities, functions based on supply and demand. We can see a lot of these issues played out in the actual oil prices themselves through technical analysis.

Chart courtesy of www.StockCharts.com

This is a one-year, daily chart of West Texas Intermediate (WTI) crude oil prices. Following the low in October, WTI made a high in November, followed by a low in December that was higher than the preceding low in October. This zigzag pattern continued until the high in late February. This high in late February in oil prices also was an extreme level attained in the Relative Strength Index (RSI). In technical analysis, extreme levels of the RSI, whether they are for oil prices or any commodity, usually indicate a point at which oil prices have gone too far and a pullback is in order. An extreme move in the RSI also occurred in August of 2011, except to the downside, which resulted in a move back up towards the 50-day moving average.

Now looking to the high in late February, we see a similar pattern in reverse. The high in late February was also met with an extreme high in the RSI. Technical analysis would indicate that a pullback is in order for oil prices. The pullback occurred in oil prices, bouncing up off the bull trendline in early April. One can see that oil prices have been forming a giant wedge. The breakout from this wedge will be crucial in determining where the next leg in the market is.

Looking back at oil prices from last year, you will note the horizontal line at approximately $95.00. The circles indicate how many times this level has been used as both support and resistance. In technical analysis, the more a level is pivotal to a move, the more important and relevant that level will be. What is of interest in technical analysis is when more than one indicator points to the same area. In this case, the horizontal support level in oil prices is very close to the 200-day moving average. In technical analysis, when commodities or stocks break down, they tend to gravitate to the 200-day moving average as both support and resistance.

Chart courtesy of www.StockCharts.com

Turning to the weekly chart, you’ll notice that oil prices are currently hitting an uptrend line that actually goes back to 2009. Technical analysis tells us that, the longer an indicator is in force, the more important it is. In technical analysis, there are no sure things, which is true for life in general. Technical analysis can help us look at the probability of what is most likely to occur through the actions of the participants in the market.

This trendline is obviously extremely significant. A break below the trendline and you will see significant selling pressure in oil prices. Conversely, with a break in oil prices above $110.00, whether it’s because of an attack on Iran or some other event, technical analysis tells us that would also lead to a significant move upwards. Personally, I would sit on the sidelines and wait for this range to be broken on either side. If oil prices break below $102.00, we could see $95.00 as the next level of support. A move above $110.00 and I think the high of 2011 might be taken out. At those points, we would need to see the price action in oil prices for further analysis.

A lot of talk has been focused on gold bullion over the past few years. The question I’ve been asked lately is: has this decade-long run in gold prices come to an end or will it continue?

Let’s look at it from two perspectives. From a fundamental stance, recent economic data points to continuing weakness in many if not most economies around the world. We here at Profit Confidential have described in detail the problems occurring and I’m sure many of you also have felt the economic hardships over the last few years. Those issues aren’t coming to an end and the “cure” of money printing by governments around the world will only mean that your wealth and buying power are going to be reduced even further.

Gold bullion has been very volatile since last summer. No market, even gold bullion, moves in one direction in a straight line. Pullbacks in gold prices, as in every market, are perfectly normal. The question a technical analyst would ask is: has the pullback destroyed the bull market in gold bullion? So far, for gold prices, the answer is no.

Chart courtesy of www.StockCharts.com

This is a daily, one-year chart of gold prices. This pattern is what normally occurs with all markets, not just gold bullion. After a long move up in gold prices, there is a period of consolidation. A pullback would be damaging to the overall bullish trend in gold prices if on every move up it was met with more and more sellers. Gold prices in 2012 are entering a tighter and tighter “wedge.” As of today, the market for gold bullion is in fact close to neutral. This is a sign that investors and traders are content with gold prices, as, if it were manifestly expensive, you would see massive selling; and, if it were “cheap,” large funds would be buying gold bullion.

What will happen next for gold prices is that one side or another will want to expand their transactions for more than the market can handle. Meaning, there will either be more buyers for gold bullion than what is available for sale, driving up gold prices, or the sellers of gold bullion will overwhelm the buyers, pushing down gold prices.

We just witnessed one positive sign for gold prices: the low in April was a higher low than the one preceding it. This is a first in 2012 for gold prices. This indicates that buyers of gold bullion are starting to want slightly more than is available. The market for gold bullion is still not yet completely bullish on this one positive occurrence. We would need to see a break above the recent trendline. Many traders and funds are watching $1,700 for gold prices as a key level. A break above that would signify that there is a large amount of demand, which would propel gold prices higher.

Chart courtesy of www.StockCharts.com

The weekly chart of gold prices is an even clearer picture of the last three years. The pace of acceleration in gold prices last year was not able to sustain that rise, which is to be expected, and gold bullion pulled back. We’re now making a very normal wedge in gold bullion. As gold prices tighten up, a break to either side will be of utmost importance, as this will signify the next leg of the gold bullion market.

I would recommend paying attention to the non-farm employment report on May 4, 2012. If we get a bad number that day or on the one in April, gold prices will surge on expectations of additional monetary stimulus. The Federal Reserve doesn’t meet until June and we’ve already started seeing weekly jobless claims start moving up. The economic problems in the U.S. and around the world are not going away. The “solution” most governments think will cure the problem is money printing. As you can see from gold prices, the drop in the value of paper money is driving people to invest in gold bullion for the long term.

Right now, precious metal stocks aren’t performing that well, even though many gold mining companies are reporting record production and earnings. Furthermore, corporate visibility at many gold mining companies is rosy, yet, as a group, precious metal stocks are mostly down since the beginning of the year. The reason, of course, is that spot prices for gold and silver have pulled back in price, but in my view, the pullback is part of a well-deserved correction/consolidation. I’m certain there is investor fatigue in precious metal stocks at this time and, if the trend continues, valuations will become extremely attractive. I know of many gold stocks that are undervalued considering their growth prospects.

As a group, precious metal stocks are just as volatile as their underlying commodities. This is no revelation. But, as a sector, institutional investors tend to take on limited exposure to precious metal stocks once a major price trend is already established. I view institutional investors as being the ultimate herd investors when it comes to precious metal stocks. So, as individual investors, we have to roll with this reality.

There really is only one big tool left in the Federal Reserve’s kit and that’s money supply growth. If you believe that the major increases in global money supplies will be inflationary, then real assets like resources and real estate should be a focus. I believe that exposure to gold and silver is an absolute must for any balanced investment portfolio. I also believe that precious metal stocks remain one of the most attractive stock market sectors for equity speculators. (See One of the Best Sectors for Risk-capital Speculators.)

Now is the time to be waiting and watching precious metal stocks for new entry points. I’d stick to gold and silver as a general rule. As I say, there are a lot of really good gold mining companies out there that are reporting excellent financial and production growth, whose share prices are currently languishing. I don’t think we’re at the bottom yet, but if gold and silver spot prices continue to trend lower this year, I’m confident the stock market will produce very attractive new entry points.

Right now during this earnings season, large-cap companies are the focus. I’m not overly enthusiastic about going long a major index, because I do feel that the stock market is in the process of topping out, this year or next. Trading precious metal stocks is not an investment strategy for the faint of heart, but for speculators, gold and silver mining companies are awash in cash and it’s never been a better time to be in this industry. As precious metal stocks languish, valuations are becoming much more attractive. As a group, I think precious metal stocks will continue to drift lower over the coming months. We’re not there yet, but a great new entry point will soon present itself.

Much time has been spent recently discussing the up and down moves in the price of gold bullion. People with a long-term investment strategy need to weigh a lot of different variables when determining what they should be doing with their funds and the varying factors that are impacting the price of gold bullion.

Gold bullion has been a store of value for thousands of years and in some cultures it is more readily part of everyday life. One such nation is India. The Indian government’s attempts to raise taxes through a higher import duty on gold bullion are having a worldwide impact on this investment strategy, as gold bullion retailers have shut their stores, have stopped buying gold bullion, and have staged massive strikes.

The Indian government has decided to double the import duty on gold bullion to four percent and enact a 0.3% tax on jewelry made from gold bullion starting in April. For over 11 days, the gold bullion retailers have been on strike and this is being felt in the price for gold bullion. While we did see a push higher in the price of gold bullion on hints last week by the Chairman of the Federal Reserve, Ben Bernanke, the long-term demand of Indian consumers is important in maintaining a stable price for gold bullion.

While some estimate that gold bullion imports could fall over 20%, I think this might be an overly pessimistic viewpoint. With so much political pressure by the people of India, if we get a repeal of this tax policy, we would get a strong surge in the price of gold bullion. When so many people are moving in one direction, politicians will eventually listen.

Indian people have long been consumers of gold bullion and will continue to do so for many decades. The good news is that, while gold bullion sales to India have almost stopped completely over the last couple of weeks, the price in spot gold bullion hasn’t moved that much at all. What this means is that there is a lot of underlying demand that has stepped up to fill those shoes. Once the Indian nation resumes its purchases of gold bullion, we could see a really strong move back up in price.

Chart courtesy of www.StockCharts.com

We are now seeing a giant wedge formation in gold bullion. If one were to draw a line connecting the lows last July and December, this would be the bottom end of the wedge. If you drew a line connecting the highs of last year with the high in late February, this would represent the upper portion of this gold bullion wedge. As we get a tighter and tighter coil within the wedge, the break-out from this formation will trigger a strong move in the price of gold bullion.

One’s investment strategy should incorporate some technical analysis to understand where we are combined with the fundamentals. Knowing we’re in a tight forming wedge, the fundamentals would indicate that a break through the highs might be slightly more probable. This could coincide with the Indian government reversing its decision and unleashing a wave of pent-up gold bullion buying pressure. Or it could be an announcement by the Federal Reserve of addition monetary stimulus. Just note that, once we break through either trendline and exceed the wedge, the gold bullion price will accelerate sharply.