Well, it would appear that I got that one right (once in a while I nail it…). Puzzling, though, is the lack of follow-through by the producers. The XEG chart below shows a sideways pattern, where it is currently hitting technical resistance. I’d chalk it up to “dirty Canadian oil” except that many of the US producers are showing similar patterns.
It is my opinion that WTI oil is very near reaching an overbought level at this time – and the fact that my first target of $72 has been pretty much reached, I am inclined to wonder if there is much neartermed upside left. Top chart on this page is a chart with my original targets on it. It shows the RSI indicator below the chart – which is not yet overbought. However, you can see it reached overbought conditions in January, and subsequently pulled back. I might suggest that, as oil prices extend a bit more, we may see a larger pullback over the summer. My reasoning behind a potential neartermed pullback include:
- Seasonality: Oil’s best period ends around this time of the year.
- Sentiment, Commitment of Traders : Crude oil speculators have been maintaining record long positions after ramping up their exposure last winter – this might suggest too much confidence in the trade.
- Sentiment, investor surveys: Sentimentrader.com does an Optix for most commodities, and that includes crude oil. In a nutshell, they take a compilation of sentiment studies from sources such as Market Vane, Larry Williams, Bloomberg, Ned Davis Research, etc – and combine them into one indicator. The line on the chart shows you if the compilation is net over-optimistic or over-pessimistic by its relationship to the horizontal extreme points on the chart. Too high, its over-optimistic. Too low, is over-pessimistic. From a constrarians viewpoint, an extreme degree of optimism or pessimism cannot last, and will eventually be reversed through price movement.
I’m actually long termed bullish for oil. It is my opinion that the 33 year commodity cycle, which I have mentioned at my MoneyShow talks and on this blog, has troughed. Here’s a blog from 2014 that outlines this cycle. I used this cycle to correctly predict the decline in commodities over the past few years by observing this cycle.
The commodity peak (broad CRB index) occurred in 2011 exactly on schedule to the cycle. This cycle seems to have left translation more often than a symmetrical peak. In English, this means that – if you measure trough to trough, you may see the bottom occur a bit after the mid-point (peak before the mid point). So a 33 year trough-trough average might mean the recovery happens over the final third, or something to that nature. If you look on the cycle chart on the above mentioned blog (click on that link), you may note that this seems to be the case. It would make sense that the trough has been put in within this long termed cycle, and a new upside move that could last for about a decade may have begun.
But….such upside will not be without its bumps along the way. Enter my neartermed outlook for a selloff on the commodity. I’d be inclined to reduce positions in the sector as/if/when RSI gets overbought again – and re-enter with the sentiment returns to a less frothy level. But that’s the trader in me.