Oil approaching short termed overbought

October 19, 201612 Comments

I noted on Monday’s blog that I am bullish on the price of oil over the coming year. My ultimate target remains somewhere near $62, although I suspect there will be plenty of pullbacks on that journey. This outlook will change if $40 support is broken – crude currently sits near $50. I suspect some sort of pullback, likely not lower than the aforementioned $40 support level, may occur in the coming months.


Seasonal trends weak in the winter

WTI oil reaches its seasonal peak around this time of the year, and tends to weaken into February. Below is a chart I pulled off of www.equityclock.com – you can see this pattern clearly on the chart. Brooke Thackray notes in his “Thackray’s Guide” that there are two seasonal periods for energy. These are Feb 25th (buy) to May 9th (sell) then July 24th  (buy) to October 3rd (sell).


Smart money is selling oil

Further, and perhaps even more importantly, commercial hedgers (aka “smart money”) is shorting oil right now. According to sentimentrader, these better-than-average investors are currently net short over 400,000 contracts on WTI. This was only exceeded in the summer of 2014. The chart below shows us how oil peaked precisely at that point – in and around June/July of 2014-followed by a decline from October and on. As you know, WTI crude has not yet recovered from that catastrophic decline.


Technical signals


The chart above shows us that a level of technical resistance resides around current price levels of $50. If and as that level is cracked to the upside, a Head & Shoulders bottom will have been materialized. Until then, the formation is incomplete. Meanwhile, the short termed momentum indicator stochastics and RSI are rounding over while the longer termed momentum indicator MACD is looking like it wants to do the same.  On a positive note, moneyflow remains strong – which can be a mid-long term bullish sign.


Supply / demand

Truthfully, nobody can predict the future supply demand picture for oil. U.S. inventories of crude oil were reported to have fallen some 3 million barrels in a late September report. Markets that had anticipated a higher level of stockpile. However, as I understand it there is still more supply than demand for crude. Reliance on reduced production via the recent OPEC agreement may be wishful thinking. OPEC recently announced some production cuts, but members  have a history of not keeping to the agreed quotas.


To me, all of the above factors suggest a bit of a ‘time out” for oil. As such, we sold our oil related positions recently, with the idea of revisiting the trade later in the winter.


    • Yes–in the nearterm, USD is overbought vs a world currency basket (RSI and stochastics way too high) and is looking to pull back a little – so that, in combination with a bit of strength in oil of late, gives some strength to the loonie. But if the seasonals, and the smart money are right – you will see the loonie weaken some time this winter.

    • We just added a new Nat Gas position on a pullback today. Technically, and seasonally we like it. Plus its a USD play– today BOC Governor Stephen Poloz – noted that Canada’s economy is weak and needs more stimulus – surprise (ha!). This means a weak loonie, and more reason to own USD assets- as noted on Monday’s blog. We like oil for the intermediate term too–its just overbought for the time being.

  • HI Keith , l have a general question on trading strategy.
    What will be the ideal short term strategy, few weeks maybe up to a month, for next year. I am looking for blue chip stocks only , maybe 1-2% weekly gains, if possible , would you use smaller position portfolio? like 5-8 stocks or still do regular 20 stock portfolio in 5% position ?
    Thanks , Mike

    • Mike 1-2% per week is 52%-104% per year
      If you can do that, come work for me!

      Best to set your sights on 8-12% per year and follow a risk-adverse but profitable strategy–may I recommend my book Sideways to help with that quest!


      • ha ha ….I knew its a bit of a stretch but you shoot for the stars and just maybe end up with 8-12% a year 🙂
        I will check your book for sure , I had couple good years 15% plus so I get spoil a bit .
        But seriously do you ever tight your portfolio to fewer stocks or just go more in cash ?

        • We do both Mike–that is, we hold less stocks and hold cash when bearish. We have position rules–not that these are appropriate for you–but they work for us. Basically:
          5% average position
          3% minimum position
          10% maximum position
          30% maximum sector weighting
          Cash–0%- 100% – as determined by our broad analysis. Note that we’ve not yet crossed 50% cash in any market. We went 50% cash in the summer of 2015–but typically 30% if we are bearish.

          As a bit of quick math will tell you–we will be about 20 stocks if/as/when fully invested and not taking a bigger than average bet on any particular position.

          • This looks like sound strategy , I wish I was more disciplined , but after all I just run my own little stash not a clients money .
            Thanks Keith for good info ….

  • Hi Keith: Since markets aren’t moving much lately, waiting for the election, would the VIX be a good trade right now, for when the confetti hits the fan? Thanks. Dave G.

    • Dave–do a search on my blog under ‘VIX”–you may change your mind on that strategy.


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