Back in November 2017 and then again in January of this year I suggested that WTI oil – if it broke $56 (which it had not yet..) would target he low $70’s, and possibly $90.
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.
Happy trading!
6 Comments
Keith – Interesting CRB cycle graph. I think it’s important to point out that because it’s a 10 year moving average, that 2014 graph ends in 2009. It would be interesting to see an updated version, because the 2011 peak you refer to is not shown.
I find it difficult to see how we could be past the trough in a 33 year cycle that had a 2011 peak, unless the cycle were very asymmetric, which it does not seem to be.
Please clarify…
I have used a better version of the chart John and will try to find it and post it to the blog – stay tuned–it will better illustrate the cycle. Meanwhile I’ve posted the one I used on the original blog.
The line is a MA, but you can see that this MA does tend to follow a rythym. Its just smoothing the trend. The chart is an old one I got from an options strategist and I don’t have an update, but the top of the 10-yr MA was peaking on schedule. It happened that the CRB peaked in 2011 so that seemed pretty in line with what the graph is showing–nothing too precise, but it never works that way. If that peak was correct, and the trough was seen recently (not shown on the graph) we could see a climb to the next peak in the next 20 years–or earlier. If you look at the cycle its not a perfect 33 years every time of course–as most cycles tend to be (nothing is that succinct). So there is a chance that we’ve seen the top a few years ago, the bottom recently and will see a new bull in the next decade.
Keith, another thing too is how anemic the XLE:USO is, as well as just XES on its own (its bumping along its long term bottom) and maybe XLE:USO is basing, but nothing really inspiring.
Charts eh?
Yes, as noted the producers have done nothing while the commodity has made headway.
Keith – you were bang on that oil would likely pullback. My question is, if oil is long-term bullish but seasonally summer is a weak time for oil, does one wait until the fall to go long on oil? Besides seasonality, I usually look for technical indicators like MACD, STO and RSI to suggest a bottom, generally at least on a daily level so perhaps wait for this and the right season? Thanks in advance for your advice. BTW, I look forward to reading your articles each week.
Thanks Rachel
In my humble opinion – oil looks to be a dead ringer for near $60 before the carnage ends. That is 10% more downside, so its not gonna be pretty. Once it finds support (which cold be slightly higher or lower than $60) then its likely a buy. Look for a bounce. Look for hooks on the weekly charts on RSI etc before commiting.
We reduced our oil by half in stages, first by selling one of 3 oil stocks, then by selling a broad TSX ETF. We now have only 5% exposure via 2 decent stocks. Hindsight I’d have sold all – but not too bad of an exposure currently. We do think its temporarily oversold and expect to sell one of the 2 remaining stocks on a neartermed bounce bringing our exposure to less than 3%.
I’d buy more upon the conditions noted above (test of $60-ish and bounce)