Since March 17, Gold has declined nearly 13%. So much for the “inflation hedge” hypothesis. Whatever happened to the “inevitability of $2,000 Gold because the fundamentals require it?” Proponents are noticeably quiet these days. Is Crude Oil headed for $200 per barrel? Maybe so; but maybe not quite yet.

As in the case of Gold, there is no shortage of fundamental reasons why the price of Crude Oil must increase. What do those who are “on the inside,” doing the actual trading with real money, think about the future price of crude oil? Yesterday’s closing prices of the crude oil futures contracts for ensuing months and years may offer some clues:

June: $125.96; July: $126.00; August: $125.76; September: $125.45; October: $125.14; November: $124.83; December: $124.51; April 2009: $123.09; April 2010: $120.42; April 2012: $118.90. What’s going on here? There’s a four-cent increase from June to July, and from then on, it’s all slightly downhill for the next four years. That’s not what one would expect if there were an anticipation that prices would continue to rise. Rather, it looks like backwardation. Does it say that some very large players have made some very large bets that the current price of crude oil is about as high as it’s likely to go for a while?

One of our most reliable Indicators (a triple Stochastic) suggests that crude oil is dancing on the underside of the ceiling. With respect to the October, November, and December contracts, all three are at 100, the very top of the range.

And what do the Candlesticks (the icing on the cake) say? In the June contract, yesterday’s price bar shows that prices gapped up on opening, and remained above the previous day’s price range all day. The price bar itself is a classic “Hanging Man,” which is a bearish signal. If prices close lower on Monday, that would constitute confirmation of the signal. Further, if price action gaps lower (and remains lower) on Monday, that would create both an “Island Top” and an “Abandoned Baby Top,” which are very bearish patterns in Japanese Candlestick parlance.

The long and short of it is that the warning flags are flying. If price action on Monday gaps lower, stays lower, and closes lower, we should reasonably expect the strong possibility that prices will at least take a breather. In any event, it appears likely that prices will peak very soon.

William Kurtz
http://www.candlewave.com