Everyone is talking about oil now. Its over $80/ barrel! Way back in the fall of 2020, when I was pounding the table on oil at $40, nobody was talking about it. Instead, people were talking about the new green deal. Solar & clean energy. ESG. Feel-good stuff. The market was also fixated on the FAANGs. They were talking about new growth stocks like Zoom, Tesla, Peloton. Oil was $40. Who wanted that? Bidden was going to crush energy usage. We’d all drive an electric car, wear hemp shirts and circle the world holding hands singing Joni Mitchell’s Big Yellow Taxi (“Pave paradise, put up a parking lot”). Again….Who wanted oil at $40? Well, I did, and I told you about it. Blog readers who listened have made serious money on that trade. Partially – by avoiding the very stocks I suggested to avoid. More, because energy has surged to even higher heights than my original $70 target. I reiterated my bullish oil case in January here.
Ok, so now what?
I am still bullish on oil. I haven’t bought a hemp shirt yet. I love my carbon burning, growling exhaust, stick-shift & hand-brake (old school) highly engaging driving machines. But…Why do I like oil stocks? Well, moneyflow into crude is bullish (pane directly below price). Somebody out there likes it beyond just me judging the trend into energy futures. If $85 is taken out, we are looking at the top of the resistance band (not marked on the chart) near $100 or so.
Yet, we should take note: Oil is just about to hit a significant technical target. And its gotten overbought. As oil gets closer to $85, it becomes more and more likely to pause. Moneyflow momentum (top pane) is overbought. Long termed indicators MACD (which is diverging negatively), and a 60-week ROC spiked recently. As did RSI. The chart below tells the story:
What about oil stocks? The chart below is that of the iShares TSX energy ETF (XEG) – which has a mix of oil and natural gas producers. The chart tells us that the market has just passed a significant level of resistance near $10. Next is highly significant resistance at $11.50-$12. MACD is diverging. Other momentum indicators are overbought–ROC peaked a while back with no negative move so far. There is a decent chance for that last $1.50+ to appear before the stocks correct. But if crude pauses, per the $85 target noted on the chart above, that would probably put the move by the producers on hold.
Seasonally, oil can experience a peak in September and see some weakness through the remainder of the year. Below is Equity clock’s crude oil seasonality chart – which illustrates this tendency.
Oil has potential to move a bit higher, now that its broken $80. However, its overbought status does put some pressure on that happening. Seasonal factors put pressure on that potential too. I think there’s a decent chance to see a stall in pricing soon. So, keep an eye. Longer term, the target would be $100 or so, should $85 break.
If you follow this blog, you may have bought energy stocks last fall (2020), then lightened your positions this spring after a strong run just like I wrote about on our emailed newsletter. Subscribe if you don’t already here. At ValueTrend, we re-bought that position to get back to our full position a month or so ago – which turned out to be a good move. After the recent surge, we have once again taken the position out and materialized a short termed profit. We still hold a decent weighting in energy. We’re now at about 12% pipelines & energy stocks. Down from about 16%. We would add back to our energy stock holdings if oil pulls back again. If not, we are exposed and can still gain on a potential move.
- I’m speaking for the CSTA conference tonight at 8:00pm EST. I’m reviewing the case for a potential period of volatility or…possibly even a bear market. Its called “Bull, Bear, Bottom & Bounce” and it presents a plan on how to trade a potentially bearish or volatile period in 2022. You can join in on the webinar for free by contacting Regan here.