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Why Oil Bears Should be Alert to the Possibility of a Reversal Next Week

Regular readers will be aware that I have, for the last few weeks, been generally bearish on the price of oil, and for two main reasons. The strength of the dollar had until recently gone unnoticed in much of the financial media, but it has been a sharp climb and, while the inverse relationship between the dollar and oil is not a perfect, tick for tick thing, a high dollar does put a cap on oil’s upside potential and keeps pressure to the downside. In addition, the main reason for oil’s climb a month or so ago, the potential agreement by OPEC to limit production, is not a reality yet and still faces significant hurdles. That bearish view has worked out well, but there is a good chance that it will change in the next few trading days, as both things that have driven oil down look like changing.

(Click to enlarge)

Figure 1: Dollar Index 6 Month Chart. Source: Marketwatch.com

Firstly, there are signs that the dollar’s rise is overdone and that the direction is about to change. In terms of the dollar index, significant resistance has been met just above 99 and, as the chart above shows, upward momentum has ceased over the last few days. That is hardly surprising. The move in the dollar has been driven by the expectation of a Fed hike in interest rates, but that now looks fully priced in. The market can be expected to start to adjust for the, admittedly slight, possibility that the U.S. central bank will once again back away from the tough…

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