A Technical Look at Oil Warns of Transportation Weakness

Oil prices have rebounded to above $59 a barrel with the basis March 2007 light sweet crude oil futures contract breaking to $59.95 on February 5, 2007. Cold weather and increased demand drove oil up.

The strong upside move should not be a surprise, given that oil continues to be a volatile play in spite of its recent bearish move to below $51 a barrel on January 16, 2007 for the first time since May 2005. Watch to see if the March contract can break $60 and trend higher. I view $60 as a key resistance level.

The near-term outlook for the basis March 2007 light sweet crude oil is moderately bullish, but, given the recent buying, the near- term picture is extremely overbought, so expect to see some selling pressure at $60. The MACD has also turned bearish.

The chart of the March light sweet shows a good upward trend, after bouncing off a lower pivot point around $51 in mid-January. Clearly a strong break above $60 could drive prices back to the previous sideways channel at $60 to $65. For this to happen, we need to see a strong pickup in the Relative Strength, which is currently trending higher, but needs to strengthen in order to support higher prices.

The March oil is back above its 20-day moving average at $55.20, and it’s facing resistance at the 50-day moving average at $59.92. A strong break here could see a move to the 100-day moving average at $61.97, followed by the 200-day moving average at $68.75. Failure to break higher could see a move back to the 20- day moving average.

As an investor, with the higher oil prices, we could see some weakness in transportation stocks and airlines. For the stock market, some retailers could also suffer, since less disposable income is available due to rising gasoline expenses.