Thomas
DeChastelain
Memorial Archives

A Look at the XOI
posted Oct 21, 2005 at 12:29AM

In a recent commentary I put forth the notion that crude oil was in the process of a correction which would take it to the $56 to $58 level. Nothing has happened to change my mind on that.


XOI Daily



Strong plunge for the sector as a whole, as it comes off its emotional, and wind-aided, peak. My feeling is that the downwards momentum will break through its 200 dma and it's trend-line support. That should initiate a lot negative bets and technical selling. As a contrarian, I see a good bottom forming shortly there after. 850 plus or minus 50 is my rough target.

XOI Weekly



The intensity of the down force reminds me of the gold sector correction of April 02 to April 03. There the emotonal peak coincided with Rumsfeld et al talking about mushroom clouds in American cities.

Gold suffered a sharp precipitious fall, followed by a large triangular consolidation. Right now I believe that is what is going to happen here. A lot of the froth is being taken out on this downleg as we speak. The remainder will get shaken out over the course of the consolidation which will end around "shoulder" season next year.

Trading strategy

Buy and hold can be a little dicey. During the gold sector consolidation, swing trading was the favoured approach and it worked well, but the break-out caught me napping. I made more money on the consolidation than I did on the impulsive bull leg...not the way to do things.

Now right now I do plan to do some buy and holding. The stocks have fared reasonably well during this correction and more importantly have good potential for "internal" growth. Look for stocks that look to increase reserves and production over the next year.

I think energy exploration companies may weather the storm better than thier gold counterparts, but unless they hit something big, they will still tend to trend downwards in my opinion. (I think why oil explorers will do a little better than golds is that getting to production and actually making money is a lot easier for junior oils than junior gold miners)

The crude oil COT below shows the commercials re-accumulating long positions. If I am right, and we are going to get a year long triangle, then the next lows will be the lows for the sector.

If the gold sector was any sign then one should give more emphasis on "quality". Dogs that show no forward progress will be getting the ole yeller treatment.

CRUDE OIL COT DATA

Of course increased military action, particularly in Iran will render everything obsolete. The "consolidation" will end then and there, and a new impulse will begin immediately. What ever crude is at the time, multiply that number by two or two and a half, and that is the price I think oil will reach. Right now I am of the belief that oil stocks will follow - but that is a discussion for another time.

Good trading,

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