Oil Holds The Key!

Sometimes, intuition and fact do not reconcile. The following charts fly in the face of intuition. They therefore warrant some discussion.

The Crudollar Chart is derived by multiplying the price of crude oil by the US Dollar Index. It can be seen from the following weekly chart - courtesy decisionpoint.com - that there are glaring non-confirmations between the Crudollar Index chart and the chart of the US Oil Fund.

• The Crudollar Index bottomed out at around 425 in early 2007 at a level that was higher than the December 2004 price. This is in contrast to the US Oil Fund chart which fell to a lower low
• The Crudollar chart recently rose to a higher point than the December 2006 high, whereas the Oil Fund Index topped out at a lower high.

Technically, the Crudollar chart is much stronger than the Oil Fund Chart.

How can that be, if the US Dollar is about to collapse? Does it mean the oil price is about to skyrocket?

Looking at the weekly and monthly chart of the Oil Index Below, this would not seem to be expected.

Note how the 17 week moving average is below the 43 week moving average and appears to be turning down.

Note how the monthly chart is showing no signs of strength.

Now this defies all intuitive logic!

How the hell can the Crudollar Chart be showing strength when a proxy for one of its components is showing weakness?

Could it be that the US Dollar is about to rise faster than the oil prices rises or falls?

The following chart is a monthly chart of the US Dollar

Yes, its PMO oscillator is showing weakness. Yes, the dollar itself is heading south.

But the non-confirmation on the Crudollar Oil Index Charts is saying - technically - that the dollar is likely to hold at above the 80 level.

Again, this defies intuitive logic!

How the hell could the Dollar hold? The Gold price is looking so strong!

Indeed, the goldollar index chart is looking weaker than the gold price chart. This indicates that the dollar is likely to hold the goldollar index back somewhat.

But a closer look shows that the goldollar index is also in a bull trend. The gold price has been rising faster than the US Dollar index has been falling.

Conclusion

In defiance of intuitive logic, the above charts are telling us that:

• The US Dollar Index seems likely to hold above 80
• The Oil Index seems unlikely to explode upwards.
• The Gold Price seems likely to accelerate upwards over time relative to a dollar that will not collapse.

There are two other logical conclusions that can be drawn. Either:

• The market knows something that is not yet transparent, or
• The charts are sending false signals

In this latter regard, whilst it might be relatively easy to manage or manipulate a single counter, it is twice as difficult to manipulate a duality. It is yet more difficult to manage two dualities. I am therefore inclined to believe the relationship charts but, of course, reserve the right to change my mind at the drop of a hat. There is no room for dogmatism in this market. I am increasingly of the view that, at a macro level, we are witnessing the end of one era and the beginning of another.

What that new era will bring has yet to manifest.