Oil Continues to Play a Pivotal Role in the Market’s Direction

Oil prices rebounded with the basis April 2007 light sweet crude oil futures contract on the NYMEX, breaking over the $62 mark on February 27, 2007. However, it fell just below the key $60 level on March 5, 2007. In Asian trading on Wednesday morning, oil edged back to $60.

This strong upside move should not be a surprise to you, given that oil continues to be a volatile play that will impact stock trading going forward. Watch if the April contract can break back above $60 and trend higher. I view $60 as a key support-resistance level.

The near-term outlook for the basis April 2007 light sweet crude oil is bullish, but given the recent buying, the near-term picture is marginally overbought, which explains the current selling pressure at $60. The MACD remains bullish.

The chart of the April light sweet shows a good upward trend after bouncing off a lower pivot point, which sat around $51 in mid- January, 2007. Clearly, a strong break above $60 could drive prices back to the previous sideways channel at $62.50 to $66. In order for this to happen, we need to see a strong pick up in the Relative Strength, which is currently below neutral and needs to become stronger in order to support higher prices.

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The April 2007 light sweet crude oil is trading at around its 20-day moving average at $60.14 and is facing resistance at the 100-day moving average at $61.60. A strong break here could see a move to the 200-day moving average at $67.69. Failure to break higher could see a move back to the 50-day moving average at $59.

As we move forward, I expect oil to continue to play a pivotal role in the direction of the stock market. As an investor, with the higher oil prices, you could see some weakness in both transportation stocks and airline stocks. As for the stock market, some retailers could suffer, since a lesser rate of disposable income is available due to the rising gasoline expenses.