Strong Global Recovery Could Push DBO Higher This Year
Global demand for oil is set to rise in 2011 as the economic recovery continues to remain strong in developed nations, and emerging market economies continue to grow. In early 2011, economic data out of the United States has reassured investors that the recovery remains robust. Employment figures, in particular, continue to improve, albeit at a very modest pace, and Federal Reserve Chairman Ben Bernanke has referenced the improving labor conditions as proof that the economic recovery is continuing to gain solid traction.
Strong economic growth is also continuing in emerging market economies such as China, India, Brazil, and Russia. This consistent growth around the globe has led many investors to believe that commodity prices will continue to rise in 2011, specifically oil. One way an investor can expose his portfolio to a potential rise or fall in oil prices is to buy an exchange traded fund. In this article, we are going to conduct technical analysis of one such ETF—the Powershares DB Oil Fund (DBO).
DBO tracks the price of crude oil. Therefore, if the price of oil rises in 2011, then DBO will rise as well; conversely, if the price of oil falls in 2011, then DBO will likewise fall. Let’s take a look at a price chart.
The chart above is showing about 1 year of price data on DBO. As you can see, there was a sharp selloff in May of last year. Fundamentally, this sell off was directly related to the widespread panic that flooded financial markets in May 2010 as Greece was facing imminent sovereign default. Finally, in late May, early June, the European Central Bank and International Monetary Fund stepped in and committed bailout funds for Greece and other struggling EuroZone countries. This served to calm currency trading volatility and financial markets, and as you can see on the chart above, oil has risen nicely since its low at the end of May.
DBO has made a very nice trending move off its May lows up to its February HI’s. In fact, you can see the green circles that show very clear higher lows throughout the move, which is a classic sign of strong trending behavior. Now, however, DBO is at a major breaking point. As you can see, price is coming into the HI’s of las May up at 30. Price reached as high as 29.50 in the past few weeks before selling off lightly to the 28 level. Currently, the two price levels that are most important are the 27.50 level and the 29.50 level. These are the two prices that DBO is moving inside of.
If DBO can break above 29.50, then it has a major test of resistance at 30. If it tests support to the downside, price will find support at 27.50, 27.00, and then 26.25.
Since the global economy is set to grow in 2011, DBO will most likely retest the HI’s up at 30.00. The demand for energy in emerging markets, specifically China and India, could very well pull price above the 30.00 area during the second quarter of 2011.