Oil Price

As I stated in class today, oil prices ($WTIC) have recently made, but not completed, a double top. The chart (click to enlarge) shows this, along with how to calculate the target price. First, it is important to point out that for a double top formation to be completed, market price must break below the neckline, which has not yet happened (also, remember this chart is EOD, or End of Day). The calculation of the lower price target is given on the chart. In the present example, assuming that this pattern is completed, so that price closes below the neckline, the falling price target is just under $40/barrel.

I have drawn a horizontal line at (approximately) that price target. Something interesting emerges: if the target is reached, we can expect a re-test of support that has existed since the beginning of 2009. Notice that there were a few false breakdowns below this support in February, but support there held.

The important question for ECN 335 is the informational content of this formation. In other words, what is this market telling us about the direction of the overall economy, commodity prices, or other factors in the near term?

Start by modeling oil prices (and commodity prices in general): demand for goods (predicated on production), and the strength of the US Dollar are major factors. In addition to these, factors specific to this particular commodity (ex: geopolitical problems concerning oil production) should also be taken into account. Next, view oil price alongside other indicators such as cyclicals ($CYC) and determine whether it is a lagging, coincident, or leading indicator (read Carnes & Slifer's text to help with this).