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Cramer charts oil: Did crude just top out?

Tuesday, 30 Jul 2013 | 6:12 PM ET
Off the Charts: A crude reality
Mad Money host Jim Cramer predicts where the price of oil is headed with the help of DeCarley Trading Carley Garner's technical strategy.

(Click for video linked to a searchable transcript of this Mad Money segment)

The price action in oil has been all over the map. And when that happens Cramer likes to consult the charts.

Although the Mad Money host believes strongly that fundamentals provide the best foundation for an investment, he also believes chart patterns can also generate valuable insights.

They can even help confirm or deny changing perspectives as they ripple across the Street.

And right now, perspectives on crude oil are changing very rapidly. Although oil had been on a huge roll for a month, "Over the last week, oil has gotten crushed, falling from $108 a barrel down to $103," Cramer said.

Has oil made a meaningful reversal? Is the price action a sign of the top?

For the following insights, Cramer turned to technical analysis provided by Carley Garner, the co-founder of DeCarley Trading and author of A Trader's First Book on Commodities.

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First, she says speculators have amassed a near record net long position in West Texas crude. Specifically, as of a week ago, large speculators were holding a net long position of 361,000 contracts. Historically, Garner says when that's happened the price of crude has peaked, near-term.

Also Garner believes the Relative Strength Index or RSI is flashing red. She says crude has now entered overbought territory. According to Garner, when similar patterns emerged in the past, the price of crude has rapidly declined.

In addition, she sees negative patterns in the weekly chart of oil. Garner says $110 has emerged as a long-term ceiling of resistance going back for more than two years. If tested, Garner believes it will hold, making upside limited.

Garner also has identified a contracting triangle formation, a bearish pattern. This chart patterns suggests to her that crude could test $90, within the next few months, or even weeks.

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Also Garner notes that there are seasonal fluctuations in the oil market and says typically August is a weaker period as summer driving season draws to a close.

On top of all that, Garner says option investors appear to be making relatively bearish bets.

All told, Garner thinks oil bulls are facing serious challenges. She thinks the confluence of negative developments outlined above suggest an even bigger correction in the price of crude lies ahead.

"Garner's track record has been terrific Lately," added Cramer. "She was dead right on gold and I bet she's dead right again on this now wildly trading commodity."



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