I know this is a most unpopular topic in these dicey, inflationary economic times, but crude oil may be on the verge of a bottom and an explosion higher once again.  Fundamentally, the reasons for a reversal higher are simmering tensions with Russia over their military stomping and occupation of Georgia, the always present tensions with Iran and their desired annihilation of Israel, and Hurricane Gustav looking to hook right up the gut of the oil rigs in the gulf.  Technically, crude rallied last week on a HUGE build in inventories and is sitting on very solid support in the 108 - 111 area based on retracements of multiple degrees.  A previous reactionary high at 111 made last March is also lending support.   Crude oil is also on a pretty reliable 54 week cycle, which means that I use a 54 week moving average as a 'trendline'.  Notice how the 54 week moving average (the blue line) contained declines in 2005 and 2006 and acted as strong support.  Notice that once crude started its parabolic move in 2007, I switched to a half cycle moving average - or 27 weeks which acted as support during the very strong up move.  The latest selloff in crude oil has violated the 27 week (or half cycle) moving average, but the 54 week full cycle moving average (in blue) is cruising up from below which should provide an added layer of support.  Also note that in today's action, the dollar was very strong once again, but neither oil nor gold retreated.  The inverse relationship between the dollar and these inflationary markets is strong, so the fact that these markets did not behave as they are 'supposed to' also says that something may be up. 

Of course, if recent lows give way, that invalidates this analysis, but I fully expect these lows to hold. 

My upside target in crude?  $157/barrel.

Weekly Crude Oil Chart:



Another market that backs up the possibility of a bottom in crude oil is the gold market.  Typically when the spread between the HUI (Gold Bugs Index) and gold is stronger than the price action in gold itself, the gold stocks are forecasting a turn higher in the metal.  The HUI/Gold spread bottomed on August 11 while gold itself did not bottom until August 15.  The HUI/Gold spread has also continued to outperform off of that low, forecasting higher prices for gold.  Of course the rout that has taken place over the last couple of months in these leading commodities has built up a lot of downside momentum, but once sentiment changes, the bounce higher could be even more powerful than the decline.  In the chart below, the price of gold is the red line in the top pane while the HUI/Gold spread is in the bottom pane.  Notice the decline in the HUI/Gold spread since last fall (under the declining red trend line) which did not confirm the final push higher in gold to the March high, or the subsequent rally attempt this past July.  The fact that the HUI/Gold spread is trying to take the lead here validates any forthcoming moves in gold, which means it should be powerful and should last.

HUI/Gold Chart: