Oil on trend, but some signs of caution appearing

September 12, 20186 Comments

WTI crude oil has been trending up since its trough low of mid 2016. At one point that trend looked to be in danger. The market looked to be cracking in mid-2017 as a price trough of $42.50 (from late 2016) was tested along with a break of the 200 day SMA.  Despite the scare, the trend remained as that support level proved to hold. This illustrates why the ValueTrend way of waiting for a crack of the 200 day (40 week) SMA and lower low on a weekly chart must both occur before a trend change is verified. Successive higher highs and lows on the weekly chart ensued later in 2017, along with an intact 200 day SMA. This verified the trend.

Something we need to keep an eye on should we hold energy in our portfolios:  Oil’s most recent pattern appears weak – we haven’t seen a new high since July. On the other hand, the most recent trough on the weekly chart at around $63 is not yet violated. Should $63 be taken out (recall my 3-bar rule to confirm a definitive move vs. a spike) – and the 200 day SMA be cracked, that might indicate a Head and Shoulders top—note the recent low shoulder on the left, a high head. That, and what might be the start of a lower right shoulder – unconfirmed at this point. At this point, my notations on the chart are strictly conjuncture. The conditions for a true H&S top are NOT YET in place. So don’t jump to any conclusions, please. I merely painted a “what if” setup secenero on today’s chart. The trend remains in place at this time.

Conclusion: Watch to ensure support remains in place–if it breaks…you may want to reduce or eliminate your energy exposure, but that day isn’t here yet.

Seasonally, oil tends to see prices peak in mid-September and then decline into December. If you observe the equity clock chart you might measure the average decline over that period as around 6% or so. For this reason, we have maintained a fairly skeleton level of energy holdings in the ValueTrend Equity Platform – at approximately 4% of our total portfolio. We might expect to reduce or eliminate that as September rolls to an end, especially if the trend breaks per my observations above. We are not taking action on this trade at this point. But we’re keeping an eye on the trend.

 

6 Comments

  • Life insurance companies such as Manulife continue to drop despite the fact that interest rates have gone up. Are these type of stocks setting up for a good trade?

    Reply
    • Hi Dave
      Well, we bought a small position in MFC – support seems to be at $23, if it fails I will use my typical sell rules. Its been sideways with a $23 floor since 2016, with a lid at around $26, and a spike a couple of bucks over that a number of months ago. So–thats my trade–buy $23-24, sell $26-27, or sell at a loss on a 3-bar failure of $23.
      SFC is not in the same pattern- its got a better trend. We were just looking for an oversold trade on MFC, but that is not a trade for somebody looking for a long termed play.

      Reply
    • Hey Pawal–thanks for this info. Being the purist technical guy that I am, I believe that most if not all fundamental factors, including forward looking estimates and beliefs surrounding securities are priced in. Moreover, it is my strong belief that this holds doubly true for commodities. That is, that technical analysis is a more potent tool to analyse oil and other internationally traded commodities (not to dismiss fundamentals, but more to put them in second place for their importance). Unlike a common stock that can usually trade off of fundamentals and the crowd’s view of those fundamentals (present and expected) – there are so many more factors affecting commodities (and currencies) that make one fundamental datapoint less significant proportionate to a fundamental datapoint on a stock. For example…when looking at oil, you have international politics (a big factor these days), you have currencies, you have supply/demand on a country by country basis, you have a much larger crowd and sentiment group to swing prices –so much larger than a single stock or even a single market. So this creates a bigger picture that makes something like inventories – while important- just one of so many factors that can swing a price. The trend on a chart, while still having its own failings- still allows us in one glance to get consensus on all of these fundamental factors.

      Reply
  • Hi Keith:

    Very sorry to see your presentation is not livestreamed from the Toronto Moneyshow. Perhaps you could see to it that we have a chance to view it later?

    Reply
    • I will ask them–not sure why that is, as every other year I have done it – livestream was on during the presentation.

      Reply

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