Oil is way overbought

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WTIC oil chart

I’d like to start with oil itself. This chart is obviously mega overbought. Its a busy chart, and my apologies for the myriad of lines on it. But, follow along if you can. We have:

  • A break of the very, very significant overhead resistance target that I recently projected on this blog. $110 has been tested and failed in the 2011-2014 period. Yes, we broke that level. But the breakout is young. It needs to remain over $110 for at least this week.
  • The price of oil is now 35% above its 40 week/200 day SMA (simple moving average). I consider anything north of 10% as overbought, and anything north of 15% as a significantly overbought level. Please refer to my book Smart Money/ Dumb Money or my new Technical Trading course.
  • RSI & Stochastics are well into overbought territory. Stochastics is already hooking down. Danger, Will Robinson!
  • MACD has broken out bullishly (as I noted in my prior oil update), but it is getting into that overbought level too.

 

 

Pardon me, but do you have gas?

Natural gas has a substantially different chart than WTIC oil. Here are my thoughts:

  • Nat gas has a long termed resistance lid that is being challenged of late. Surprise, surprise, this resistance goes back to the same era of technical resisttance of about a decade ago that challenged oil.
  • It is not overbought from the moving average perspective. You can eyeball this in the look of the chart too–its clearly not in a parabolic pattern.
  • Momentum oscillators look downright bullish right now – note the hooks coming off of oversold levels. Very different than oil. MACD (the longer termed oscillator) looks absolutely delicious!
  • The pattern looks to be range-bound of late.

What about the producers?

As I have noted in past blogs, there may be some catch-up to do for the producers vs. WTIC oil. Particularly Canadian producers. The chart below shows us:

  • The same level of technical resistance that was present in WTIC oil prices between 2011 and 2014 was there to frustrate oil stock holders. This time, unline in 2011-14, we have some room to go before that resistance is hit. The XEG chart suggests that level to be $17, and prices today are $15. So thats a postive point in favor of the producers.
  • However, RSI, stochastics and MACD are pretty overbought. Yikes!
  • Finally, the XEG chart is something near 28% over its 40 week SMA, and you remember my rule surrounding those levels noted in the WTIC commentary suggests 15% is too much.

 

 

Conclusion

As we noted in the ValueTrend Update newsletter, we have reduced our energy exposure from 13% to 10% of late. We may reduce it further if we see technical deterioration.

Consider the evidence presented above a heads-up for a likely correction in energy. Factors like the geopolitical strife surrounding Russia and inflation in North America factor into the equation. But the charts will tell us what we need to do. Of note, investors who have focused a bit more on gassy-stocks are likely to weather any potential pullback much better than the energy-producer stocks. As such, one might focus on oil-concentrated producers over gas- concentrated producers, were you to pare your holdings back at some point.

23 Comments

  • Thanks Keith.

    1. Please correct the typo in your ETF symbol. You mean XEG. Not XEB.

    2. You usually use 3 day 3 % rule for a trend to be established. Here you seem to imply it is one week and 10%.
    Any rationale?

    Reply
    • Mano thanks for noticing the XEG symbol error–fixed
      When I talk about the stock being overbought via the % over the 200 day (40 week) SMA, I am not referring to a trend breakdown and the 3 day (minimum) rule. It is simply an indicator that the stock or market is stretched. As such, I do not sell out like I would if it were a trend breakdown. However, in my case, I am quite exposed to energy. So I chose to reduce my position from 13% to 10%. I note in the blog that I would sell if technical deterioration, aka trend deterioration, starts – I will sell more assertively.
      We just reduced another commodity position today that was uber-overbought. Again, no trend break, but the stock had gone over our maximum position size.
      Please enroll in the TA course if you have not done so – best $100 you will ever spend. The course talks about position sizing rules and selling into overbought markets to reduce your exposure.

      Reply
  • Great update Keith, I rely on the variety that you give us.
    So keep Gas producers for now, keep oil producers for now since we can still go up by a possibly another 13% using XEG as a reference, but don’t speculate on the oil commodity still rising significantly. That’s my takeaway. At the same time you have trimmed oil producers so if we have any producers who are at the top end of their potential, trim those, but there may still be some runway for producers but it is getting shorter.
    Not sure if VT buys inverse Beta Pro, but if you do, would you consider inverse oil on a bit of a pullback? The “news” of the invasion is out and built in, and the possibility and hopefully for the people of Ukraine the possibility of some sort of end occuring sooner than later, the potential for the commodity pullback is greater than further upside.
    Thanks

    Reply
    • Daddyo—smart observation re the news is out and built in — remember to buy or sell (depending on if the potential event is bearish or bullish) the news then reverse the trade upon the release of the news–per my recent blog on that subject.

      Reply
  • My second question relates to technicals vs fundamentals, plus the assertion “the trend is your friend”. The example I will use is a specific agriculture company who like oil is continuing to rise because of the fundamentals from the invasion. Their product is in demand, however it was not so overbought prior to the invasion. And I don’t want to focus on the stock, rather the 2 questions.
    T vs F- In this example the fundamentals say this is a great hold. Plus the trend continues upwards so it is our friend and we don’t sell a friend. And a stock cannot go up forever, but google and Apple did (for all intents). PE is only 17 times so not excessive. So positive fundamentals.
    But technicals say way overbought. RSI 87; 53% above 200ma; MACD straight up; Full STO at 97 but still hooking up. So my question is how does an investor trade off the fundamental strength vs what says is technically overbought?
    This example I think is a great case of conflicting signals, so how given no clear answer does an investor decide which overpowers the other, T or F?
    I would argue one sells (and buys back after minor correction), or one holds because whatever technical correction may take place, the fundamentals should encourage it to go up further.
    Daddyo

    Reply
    • In this case I agree with holding Daddyo-knowing you are more passive as I have gotten to over the years via your comments. Importantly-the big picture- which as you know I have been harping on, and on, and on, and on, and on about is inflation and a commodity super cycle. We are in that situation now. There simply MUST be pullbacks in every super cycle. Were there not pullbacks in the last 11 years since the 2010 bull market super cycle for stocks began? Of course there were! Now, its an inflation and government (plus consumer) related debt super cycle. The CRB (commodity research bureau) index will IMO rise for years. And along the way, lots of waves to play on, like a surfer!

      Reply
  • Hi Keith,
    As a beginner in TA, I am just curious about the particulars that you used:
    1) SMA vs EMA
    2) 40 SMA, not 30 or 40
    3) Is there a reason the 10 SMA matches well with the 40 SMA?
    4) Full Stochastics, not slow or fast
    Thanks,
    John

    Reply
    • I use the 40 week SMA which is the 200 day SMA equivalent for my main trend verification tool
      The 10 week SMA is nearly the same as the 50 day SMA. The tow together look similar in trend to the 200 dan the 50 day SMA’s which are the classic pair to watch
      Full stochastics gives you crossovers
      EMA vs SMA–please refer to my TA course–I explain the reasons there why I like the SMA

      Reply
  • Ooops,

    I meant 50 (not 40), when I said: not 30 or 40, in my comments previous comments (point #2).
    Can you change it for me?
    Thanks.
    John

    Reply
  • Thanks for the update Keith, very interesting times. Makes one wonder where the smart money is going now.

    Reply
  • With oil so high the Canadian dollar should be much higher but the US dollar must be seen as a safe haven currency because it is skyrocketing higher

    Reply
  • Something had to bring this overpriced market down. Looks like high oil and war will be the main factors this time. There’s a lot of air between here and the 200 week moving average on the S&P

    Reply
  • Copper has been on a terror. Is this a sector that is now overbought? It looks that way. Gold and silver seem to be catching up finally.

    Reply
    • Yes metals are overbought too. We haven’t yet taken them down, but one thing at a time….we will—meanwhile, just reduced another commodity position yesterday. Not selling out but reducing.

      Reply
  • Good on the daily looks way overbought not sure if I’d be legging into that now

    Reply
  • Hi Keith you mentioned reducing position in oil producers , would pipelines fit into same category or would you hold on to them bit longer. Tnx

    Reply
    • Pipelines often have an energy production component so yes, it includes pipelines for sure.

      Reply
  • Hi Keith,
    Point taken on oil being 35% over the 200 SMA. If the current breakout trend holds over $110/barrel WTI over the next week or even 3 weeks, how would one determine the potential upside?

    Also, the S&P 500 is once again below its 200 SMA. If it closes below 4300, then that will be day 2. Will you start legging out if it closes below 4300 for a third day? Also, would the downward support levels be 4000-3800?
    Thanks

    Reply
    • The last significant resistance was $150-ish in May 2008 – that might be the current target if it keeps going. Then if 150 breaks–no resistance, so hard to target it.
      We have legged out a bit by default when we sold 3% of our oil and 3% of another commodity position recently. AKA we are now 11% cash total. I will wait a full week (the 3 day rule is a minimum–indexes are given a little more time due to their diversified nature)–so if 4300 is not recovered by the end of this week I will sell some more to get closer to 15% cash. And so on…-p please take my TA online course for more on this strategy.

      Reply
  • Loved the video – – entertaining – watched it 3x – hilarious to watch you struggle not to call Trudeau and idiot (in particular) – nice to see your passion. Your point was well made and well received whatever that is worth to you. Quacks like a duck…it’s a duck…he’s always been a duck.. Anyway, taking your course (very good) – watching 200 sma – and selling the news – curious what your cash position is right now, considering it’s a cyclically strong period vs. how this unnecessary war keeps moving,

    Reply
    • David–see my comments to Wendy. Because we have been just starting to reduce (not eliminate) commodity exposure, and the market is precarious, we are now at 11% cash. More in the VTAG. Next week will push us to sell more if SPX isn’t back to 4300. One leg at a time, as I teach in the course.
      Re the video- yes, it is hard not to call a duck a duck.

      Reply
  • You say you should exit the energy commodity, but would that include pipelines? I would expect NO in that they are not affected directly by the price for the commodity, rather the volumes of the commodity. There is every reason to suggest pipes could see good or great volumes as a result of the invasion, and the growing demand for energy.

    Reply
    • Some pipelines like PPL (disclosure: we hold in our income platform) have production as a significant part of their exposure. Note that I am OK long termed on oil- its sust overbought due to the Ukraine situation and will likely pull back when dust settles one way or another in that situation

      Reply

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