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Oil. What would we do without it? It fuels our cars, cooks our food, and goes into the production of just about everything. It’s basically the lifeblood that flows through the veins of economies.

But if it’s such a helpful resource, then why is it giving us all such a headache?

The answer to that is simple: because it doesn’t come cheap… at least not recently! Commodities have been on a tear lately, and oil has been leading the way. As a matter of fact, oil has been going nowhere but up since early 2009.

A heavy demand from booming countries, mostly in Asia, has been propping up oil prices. China, for one, has been buyin’ up oil like there’s no tomorrow to satisfy its economy’s enormous appetite for black crack. This is one of the reasons why Brent crude oil was trading at over $120 a barrel while WTI crude oil was at $114 a barrel.

Another explanation as to why oil prices were on the rise was political unrest in the Middle East and North Africa. Some say that the uncertainty in this oil-producing region is responsible for padding oil prices with a risk premium of anywhere from $15 to $20.

However, it seems markets have finally grown tired of seeing oil prices up in the sky. Last week, oil took a massive 14% dive, its biggest weekly drop in over two years. On Thursday alone, oil slid back $9, helping price break finally below $100.

Considering how sharply oil climbed from its year-to-date lows (40% dude!), many believe what we witnessed last week is just the beginning of a huge correction.

Who cares about oil?

“I trade currencies, not commodities! Why should I care about what’s happening to oil?!” Ah, young padawan, you have a lot to learn.

Consider it part of your fundamental analysis to keep track of black crack. Its relationship with the Canadian dollar is what makes it so important. Oil is one of Canada’s largest exports, which is why we often see the Canadian dollar rally whenever oil prices are on the rise.

Take a look at these sweet charts I’ve got on WTI crude oil futures and USD/CAD.

WTI Crude Oil Chart

WTI crude opened last week at 113.85 and traded as high as 114.825 early on Monday. However, it was all downhill from there, as WTI crude went on a nosedive, falling all the way down to 97.85! That was a larger fall from grace than that of the L.A. Lakers (sorry Lakeshow fans, I just had to).

However, using the handy dandy Fibonacci tool, we can see that price seems to have stalled after testing the 61.8% retracement level on Friday. In addition, this lines up with a former support area from early March. With Stochastic nearing oversold conditions, all them black crack addicts might wanna get their fix soon!

Now, let’s see what’s been happening on USD/CAD.

USD/CAD Daily Chart

Well wadya know? Is it me, or does USD/CAD look just like the WTI crude oil chart, but just upside down? Price has retraced back up and tested a potential support-turned-resistance point at .9700. In addition, this price area lines up with the 50.0% Fib and Stochastic is almost in overbought territory!

Is it me, or is there a potential trade setup here?

Technically, everything seems to line up. Fundamentally, even with this recent setback, many believe that oil prices should remain steady for the rest of the year.

What do you guys think? Is it time to go short USD/CAD?