This much is obvious: to profitably trade markets, it is necessary to predict the movement of prices. However, price action can be predicted only in terms of probability; nothing is certain. Many traders have been broken by not realizing that even though an event is highly probable, it still may not occur, and that even though an event is highly improbable, it still may occur.
This is true in any market, and heading into 2007, it is true for the extremely volatile crude oil market.
Throughout time probable events will become actualities more often than not. This brings us back to the problem of evaluating price movement probability. The two methods commonly employed to do this are technical and fundamental analysis, and the proper application of both is necessary for an analysis of the probable, but by no means certain, direction of crude oil prices in 2007.
BEHIND THE PRICES
Technical analysis holds that prices and price actions depend on market sentiments, which are often stated to be fear and greed. This approach assumes that the most reliable indicators of future prices via market sentiments are price action, volume, open interest and indicators based on these measures.
Another area of technical analysis draws on certain whole Fibonacci values obtained by adding successive numbers such as 1, 2, 3, 5, 8, 13, 21, 34, 55. Other analysis methods that are generally lumped in the technical analysis area assume prices tend to turn near symbolic whole numbers. The $30 level in the past was seen as a sure sign of overbought conditions. As the market rallied, the benchmark rose to $40, $50, $60 and so on until no one could get anyone's attention unless they called for $100 crude oil.