Crude oil prices plunged on Friday - the sharpest one-day fall in percentage terms since December 2004.

This morning,  however, crude was up almost $1, touching $115.57 a barrel on the Nymex.

Rick Pendergraft in Investor’s Daily Edge says strong trendline support for the crude oil should prevent a further fall in prices in the coming months. But falling demand and a breakout for the US dollar mean $147 will be the high water mark for oil for several years.

How can I have what seems to be opposing views on the same commodity?  Easy, I am basing the short-term bullish view on technical factors, and I am basing the long-term bearish view on fundamental factors.

Let me explain.  In last week’s article, I showed two charts that are relevant here.  The first is the chart of oil itself.  I noted the $110 level as an area of support for three reasons: the high in March, support in May, and the 200-day moving average.

The long-term trend for oil is still to the upside and it will be until it breaks through this support.  This is the foundation for my short-term bullish view.

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The second chart was the long-term downtrend for the dollar.  The SEC manufactured rally that started on July 15 only brought the dollar up to its trend line.  It didn’t break above the trend, just jumped up to it.

The chart of the dollar is a secondary reason for me to be short-term bullish on oil.

Let’s face it, a big part of the jump in oil over the last few years can be directly attributed to the fall in the dollar.  It stands to reason that oil won’t break major support without a breakout of the dollar.  And I don’t look for this to happen until the Fed can raise interest rates.  Given the current economic environment, it doesn’t look like the Fed will be raising interest rates anytime soon.

As for the long-term bearish view on oil, consumers are fed up with high gas and oil prices and we are seeing a shift in demand.  This is similar to what happened in the early 1980s when we saw oil fall dramatically as demand fell for five straight years.  The higher the price, the lower the demand.  Since the supply and demand curves for oil are somewhat inelastic over the short term, price jumps and drops have little impact on usage.  But when prices stay high for extended periods, the entire demand curve shifts to the left. 

The other thing that will happen eventually is that the dollar will break its downtrend.  It might take a while, but eventually the Fed will start raising rates to combat inflation.  When this happens, oil will fall.  It might not fall as fast as it rose over the last few years, but the people arguing that oil will never fall below $100 ever again are forgetting to include a strong dollar as part of the equation.  I don’t know how you can argue that oil will go higher forever when dollar weakness was a main contributor to the rise.  Eventually, the trend will be broken in both the dollar and for oil.

Just remember, you need to know whether you are trading or investing.  The difference between the two is extremely important.

Source: Trading On Technicals: Investing In Fundamentals