Lots happening out there in the world of crude oil. First, we have the conflicting expectations regarding a production freeze at Sunday’s meeting among key global oil producers in Doha, Qatar.
Hopes on a positive outcome (i.e. output cuts) have driven WTI through my prior mentioned $42 breakout point this week. The weekly chart shows us a bullish breakout from the downtrend, a break through the 200 day (40 week) MA and through the recent neckline of the consolidation pattern. Adding to those positives are increasing moneyflow momentum (top pane) and cumulative moneyflow (bottom pane). Shorter termed momentum studies stochastics and RSI are overbought. Longer termed momentum study MACD looks good.
Despite the positive technical developments for WTI crude, if there was ever a time to wait a little bit longer for a confirmation of the breakout, this is it. I think it’s a mugs game to buy oil until after Sunday’s meeting. However, we will have clear direction on how to play crude after Sunday. If cutbacks are on the table—look to buy oil so long as $42 + prices can hold. Technical resistance targets are $45, $60, and the high $70’s. Yes, oil may spike hard after a positive meeting. But that’s the price of a cautious trading strategy on oil.
If no agreements are likely to come out of the meeting, we should expect to see a flat or bearish follow-through for crude – that is, until the next meeting (there have been a couple of prior meetings affecting prices over the past few months). Our strategy would be to avoid, or (for aggressive speculators) consider shorting back to the low/mid $30’s.
At this point, it’s a mugs game to guess Sunday’s outcome. Your guess is as good as mine.
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Thank you for this fantastic blog. In the past few months I joined the group of your faithful followers.
Recently you have mentioned that you will play the VIX through HUV, and it is a very short term trade.
The oil-induced rally made me wonder if it’s time to cut the losses on HUV or to hang in there longer and wait for the pull back? What are your thoughts? Do you still hold it?
I view VIX as a very favorable risk/reward trade.
It’s likely downside is 12, which is less than 20% from here. Its likely upside is 18-20, which is 40%+ from here.
Worst case is 10 (historically), and that is rare. That’s 35%-40% downside from here. Maximum upside is probably about to VIX 28, which is a double from here.
Either way, you are better than 2:1 return to risk potential. Don’t trade if you don’t like those % figures.
I still hold it, given the odds of an eventual move. But that may involve some hairy and scary times before that upside materializes.
Technical’s are improving though, but I agree it’s not prudent to act on the technical data ahead of Doha. The outcome of Doha is anybody’s guess and the talk of a production freeze is no doubt already baked into the price of oil.
Have you seen today’s IEA report saying it expects oil supply to dwindle substantially as a result of US shale shutting down. I believe, in general, most people have an overly negative view (understandably) from the media coverage. Here’s the article:
Ron — I totally agree with this article–a manager who I respect deeply is Howard Marks, Oaktree Capital. He likes to talk about all markets being a pendulum. They swing from one extreme to another. The problem is always knowing the timing of that reversal. However, as he notes, while its difficult to know how long the pendulum will stay at one extreme of the spectrum (overbought or oversold) – you can get a fair idea of whether it is at one of those extreme ends. Most of the time, remember, the pendulum resides swinging towards one end or the other but is contained within that “safe” zone of not yet oversold or overbought.
With oil, I am 100% convinced we are/recently were at the extreme oversold end of the spectrum. I do believe that we will see $60 or so in the not too distant future. And as you note, the upcoming meeting will either verify the baked-in production freeze, or it will send panic shocks if things are murky (a real possibility). However, the factors mentioned in the article you note will eventually drive prices up no matter what happens this weekend. I view any panic selling next week, (not a prediction–who can predict??) as a time to buy after a settling.
In February, the oil price bottomed at $27 then rebounded to $34 and then started to go down again. At $30, I started to leg into HUC and was hoping it would at least retest the $27 low so I could add to my position. At the time the media was saying it was going to $20 or lower. The price never retested $27 and I didn’t get my chance to add to my position. I am still holding my HUC position for the long term but started hedging it around $40 oil and is now 100% hedged. If the oil price does go back down to $30 or lower on panic selling, I will get my chance to buy my full position.
Our exposure to oil was via pipelines and we just sold that–will go back in if as when developments play out favorably next week/
I have difficulty putting any creds to Doha this weekend. I don’t think any of the members can be believed any further than I can throw a grand piano and as Joe Chidley said in his column in the Financial Post today, OPEC is a cartel, not a police force and members don’t always stick to targets (now there’s an understatement).
That oil prices may rise is a possibility but because of cutbacks in production elsewhere, i.e. North America.
My wife worked for Saud Air (Saudi Arabian Airlines) a long time ago. She met some high-ups (various Princes and wealthy oil types) while there–she told me stories of the very different standards — she felt these power players look at things differently when it comes to dealing in personal relationships and in business relationships than here–or at least they did back then (30 years ago).
But, so too do many European countries–I’ve heard about how government types will assign different property tax rates depending on how nicely you treat and negotiate with a civil employee in socialistic-inclined countries.
We always have to be careful when assigning our way of doing things to other cultures and thinking they will act in a similar manner. We can be mistaken.
Would you recommend holding a gold ETF based on the gold price as a hedge? Would it be better to trade it within the consolidation? Thanks.
I like the big picture for gold but its showing current neartermed weakness–as such I sold my XGD units –we now only hold 3% in a gold ETF (HUG) but thats it. I will buy back in when it looks to stop its neartermed decline.
Is this going to be a buy the rumor sell the news event regarding this sunday meeting?
Like I said in the blog Dave–your guess is as good as mine!
With Smart REIT, are you concerned about a correction? Do you think it will not be correlated with the market? I am interested in buying it. Thanks.
John–you never know how much correlation a security will have to a market correction–but thus far its been a low beta play and not tending to correct as hard. Also–You never know IF there will be a correction, thus we have to keep SOME exposure to the market–we trade the odds, not absolutes. Thus we always have to hold some exposure to the stock market. We don’t pull out entirely if we are bearish – we only reduce the total exposure through cash, beta, and hedging.