Many of you are probably confused as to just what is going on with the price of energy and gas. It’s reminds me of being on a rollercoaster. There are the ups and downs accompanied by the feeling that you have no control over what happens next.

The recent volatility in this sector seems wild and unable to be tamed. In my opinion, there are two factors contributing to the sharp drop at the pump for consumers. One is the upcoming political election (party in power wants to keep their voters happy) and the other is the news of new oil field discoveries throughout the world.

but could we possibly have foreseen this kind of drop in consumer gas prices…

Let’s take a sample energy play and determine whether or not technical analysis would be helpful in regards to market timing.

BHP Billiton Ltd. (BHP) is a diversified resources company that operates in several commodity businesses, including aluminum, energy coal and metallurgical coal, manganese, uranium, silver and titanium minerals, and has interests in oil, gas, liquefied natural gas and diamonds. (Source: Marketwatch)

Now, let’s bring up a chart. I chose the one-year weekly view in order to target the appropriate time frame of volatility.

 

Source: Bigcharts

This chart tells many stories. Let’s start with the Relative Price Index (RSI) beginning in mid January through the end of April of 2006. This is where you will notice that I have marked two specific points connected by a slightly downtrending red line. If you then scroll up to the top, you will find that the price of the security was going through the roof. This disagreement in trend as you may recall from my previous posts is known as a divergence and we should expect the price of BHP to come back down to earth. This was about the time when the average price of gas had risen above $3.00 per gallon.

Now that technical analysis has warned us, let’s flash forward and see what happened next. BHP has since tanked from its high near $50 down to its current price around $35.65. The first two red dots that line up vertically on the Directional Movement Index (DMI) and Moving Average Convergence Divergence (MACD) tell us to sell. Both are very powerful indicators when used together, especially when the sell signals are given at the same time. Keep in mind that we were previously warned of the drop in price to come by the RSI.

So, here is where the MACD and DMI take over. At this point, gas prices are falling sharply and most people are clueless as to just what is going on. However, you are now the one with the market knowledge advantage. On the MACD, the blue line never crosses back above the red. The DMI struggles from June to September to hold prices up with no avail. In the event that the one indicator says buy while the other says sell, you should note that this would equate to a “hold” recommendation.

In the beginning of September the DMI turns negative and is now in unison with the MACD in their combined “sell” recommendation. This means that prices will continue to fall. The next question on everyone’s mind is, “How far will they fall and what are the key support areas?”

Source: Bigcharts 

Well, the nice thing about BHP is that its support and resistance levels are easy to find. Each level is marked by a horizontal black line. These levels of support and resistance are key areas to watch and can be found by looking for price areas where the stock has repeatedly bumped up against an “imaginary” wall and suddenly begins to trade in the opposite direction. 

BHP is currently trading in the range located between $35-$40 per share. Chances are highly likely that the price will at least test the $35 level for support. If in the event the stock drops below $35 the next area for testing would then be $30 per share etc.   

Since BHP is in the energy sector we would expect to find similar indicators and signals that would indicate the similar activity. With global demand for energy on the rise we should not anticipate the price of gas to remain supressed for long. Just remember to watch for the key levels of support and to keep an eye on the main indicators as discussed above. Maybe you can find the next divergence between price and RSI, but in the reverse fashion (RSI trending up and the price of the stock trending down).

Good Investing…