Many readers have been asking about oil.  It’s not that I haven’t been interested, it’s just been a real bear to analyze.  Here, after a dozen hours of racking my brain, is where I see it.

Like many stock indices and currencies, Crude Light (CL) is at a critical stage.  It reached 114.83 after breaking out of a diamond pattern in April 2011, only to back test the diamond six months later at 74.95.  It then retraced .886 of that plunge, setting a lower high of 110.55 in February before plummeting once again as low as this morning’s 81.21 (the .886 is just below at 79.01.)

CL now balances on a precipice, where a move in either direction is likely to be huge.  We’ll examine why, and which course is more likely.

continued…

There are few assets whose prices are joined so strongly at the hip with USD.  The inverse relationship normally means oil prices increase as the dollar drops in value.

Now, as central banks everywhere — but, especially the Fed — consider additional QE to “save” the economy (but, really the markets), oil’s fate is in the same boat as equities and the euro.  Will they or won’t they?  We’ll look at both alternatives.

The Bullish Case

If the Fed starts up the printing presses, stocks and oil (in dollar terms) will soar and the dollar will fall.  The fan lines on which CL now RESTS will serve as powerful support and we’ll see the harmonic patterns to the upside fulfilled.

Note that CL has established Points X, A, B and C in both a small Crab pattern (red) and a larger Bat pattern (white.)  A normal 1.618 completion of the Crab pattern and .886 completion of the Bat pattern points to the same level: 134-139.

Note that this is the same price level as the apex of the small rising wedge — though I don’t think it would necessarily happen at the same time as the apex (more on that later.)

The Bearish Case

A decisive move below 79 would break one important fan line from the 2009 lows and another from 1998.  The intersect at the red Point C in the chart above.  The chart below shows the bearish potential in the event that these fan lines fail.

The next lower fan line is currently around 50, and harmonic patterns portend even lower levels like 42.51 in the Spring of 2013 (the red Bat pattern) or 26.39 (the purple Bat pattern) many years out.

So, which is it?

My best guess is both.  I believe the central planners have little choice but to try and print their way out of this global slowdown.  It won’t work, of course, but it will keep the game going a little longer.  In the meantime, it should ramp up both equity and commodity prices.

My top case — a real back breaker — is that we see the Bat and Crab patterns complete on the upside, establishing a higher Point C in the 134-139 range around March-April 2013.  From there, it should be all downhill — as should the economy after many months of $120+ oil.The timing is pretty well supported by RSI, which has channeled very nicely for years, and by channels parallel to the trend line B-D, shown below in white.  Note that it’s the same slope as the A-C line would be, if indeed we make it that high.

And, that Point C would fit nicely with the mid-line of a channel that can be drawn based on the yellow fan line.

 

Going out beyond 2012 involves more than the usual speculative bent, but I think the scenario fits with the economic picture we face.  Of course, if the politicians and central bankers sit on their hands and leave the endangered nations twisting in the wind, don’t count on any of this forecast proving out.  In that case, I’ll be looking to short everything I can except the dollar.

Good luck to all.