Merrill Lynch Technical Analyst Bob Farrell once said that bear markets are characterized by an initial panic, followed by a reflexive bounce, then a final bear movement. Perhaps this plays into the Elliott Wave Theory of 3-wave counter-trend moves. Whatever the case, it is my belief that WTI and Brent crude are in a primary bear market. They both have broken out of a 3-year triangle to establish a downtrend. We’ve seen the initial panic move – as you no doubt have noticed. I believe that last week’s rally, which I have been suggesting on this blog was overdue, is really just a reflexive bounce within that primary bear market for oil. Oil was mega-oversold and needed to take back some of that excess. I believe that after the current rally (assuming it continues), things will get ugly again for black gold.
Martin Pring, by the way, once noted at a lecture that if a security becomes deeply oversold (from an oscillator perspective)–it usually indicates more pain to come. This, despite the potential for a near termed bounce. This plays into Bob Farrell’s observations of reflexive bounces within bear market trends. Today’s chart shows us the long termed (weekly) WTI chart above, where you can see support around the neckline of the 2009 bottom formation on oil. We’re bouncing off of that $54-ish level right now – note the lack of positive confirmations on the weekly momentum oscillators, despite positive daily chart oscillator confirmation (not shown). A rally could take us right back up to $70-ish, as marked on the chart. But the triangle you see on the same chart suggests a bigger picture bear. I’ll not be surprised to see $40 or thereabouts on oil before the end of the winter.
I’ve also posted a chart for the iShares Energy ETF below. This group could rally back from its oversold level to former support at round $16 but it needs to crack current resistance of $14.50 first. Not a bad trading potential for the short termed investor.
Personally, I have one oil stock in the ValueTrend managed equity portfolio. We sold the majority of our energy exposure in August. I will use the current rally to divest myself fully from the energy sector. Could I be wrong about my bearish prognostics prospects for oil? Sure! But at this moment, my focus is on favourable sectors such as technology and the US banks. I noted these plays on my BNN appearance on Friday. Here’s the Globe and Mail article and clip:
I’ll be back with my usual Christmas season special blog this Wednesday. I enjoy writing this one every year–this is the blog where I try to provide readers with an educational tidbit, and a bit of trading philosophy. Hope you have time to read it.
Meanwhile, 3 more shopping days ’til Christmas – so get out there and spend your money to drive those retail and consumer discretionary stocks higher!!!