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Crude oil sinks hope of early recovery

By Colin Twiggs
August 10th, 2011 6:00 a.m. ET (8:00 p:m AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.



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I will post fresh analysis to a trading blog through the day, as various markets open and close. Posts of no more than a few paragraphs are easier to digest and the Comments section on each page will hopefully encourage greater interaction with readers. Praise is welcome but constructive criticism has helped greatly to strengthen my analysis over the years.

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Crude Oil

Today's bounce on world markets caused a rally of Brent Crude on the hourly chart, testing the former primary support level at $105/barrel. Institutional buying of stocks does not alter the fundamentals: high crude oil prices will cause a double-dip recession. No action by the Fed can change this. Every crude oil spike in the last 50 years has been followed by a recession.

Brent Crude

* Target calculation: 105 - ( 120 - 105 ) = 90

Retreat below resistance at $105 would confirm that Brent Crude has joined Light (WTI) Crude in a primary down-trend. Target for the down-swing is $90*.

We need a major re-adjustment of crude oil prices to set the global economy on a sound footing.

China Faces Lower Growth

China's growth over the past couple of decades was based on large increases in government-directed investment. As a consequence, it had to run large trade surpluses to absorb the resulting excess capacity in manufacturingÅ…. This can't continue.

~ By Michael Pettis - WSJ.com

As Japan and other fast-growing economies in the past have discovered, continued infrastructure spending grows increasingly wasteful and fails to deliver further growth. Subsidizing business through artificially low interest rates may encourage private investment as an alternative, but leads to:

  • bloated, inefficient corporations;
  • high inflation; and
  • massive speculative bubbles.

Options are narrowing and a shift to private consumption as the main driver of future growth is not without its risks:

  • low interest rates and high inflation are eroding private savings;
  • higher interest rates, however, would unmask business inefficiencies and collapse the speculative property bubble;
  • higher wages, on the other hand, will fuel inflation.

This Chinese puzzle may not be easy to solve.



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