Heating Oil Is Setting Up to Fall

• Posted by Greg Harmon
• on February 2nd, 2012

The monthly chart below for Heating Oil, $HO_F, below shows a year long bull flag after a two stage run higher from the 2009 low. It has a solid Relative Strength Index (RSI) sitting at just under 60 which has been in bullish mode all of 2011 after crossing through 60. The Moving Average Convergence Divergence (MACD) indicator has faded and turned negative, which happens in a flag, but the negative turn make you take notice. It is also sitting between the Median Line and

Lower Median Line of the Andrew’s Pitchfork. These lines attract the stock and with price in the middle it could go either way. this fits with the ability of the flag to resolve either higher or lower. A resolution higher would have a target over $4.25 and a breakdown a target back near $2.00. The ratio chart or Heating Oil against the other fuel, Natural Gas, $NG_F, gives some clues as to how this may resolve. This pair bottomed and has been trending higher since 2003. The RSI is getting very high though. This could correct through a pullback an the ratio or a through time with a

sideways move in the ratio. This also applies to how the ratio could correct for being outside of the Bollinger bands, consolidation or pullback. Either way it is extended. The final clue comes from the chart of Natural Gas itself. It broke down through a 13 year rising trend support line a few months ago and looks to continue lower. The RSI is not anywhere near extreme and the MACD is only starting to grow more negative. If Natural Gas continues lower to support at 2.10 or 1.65 below that

the ratio above could still rise, but that would likely send the RSI to near 90 without a correction in Heating Oil. It is much more likely that Heating Oil will start to fall to correct at some point in the near future.

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