Oil still needs to break its neckline

December 1, 20168 Comments

Oil’s outlook is improving, but I’m not jumping on the oil bandwagon just yet. I noted on this blog in October:

“U.S. inventories of crude oil were reported to have fallen some 3 million barrels in a late September report. Markets had anticipated a higher level of stockpile…. 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.”

While the recently announced agreement seems to be positive for an oil rally (OPEC history aside..), there are a couple of factors we should watch from a technical perspective.

First, there are seasonal factors. Oil tends to have relatively weak performance at this time of the year albeit with a positive spike in December. It enters its period of strong performance in late February. Keep in mind that seasonality is a background – a statistical measurement of likely relative performance. It’s not the panacea of investment strategies. But we do need to keep the seasonal tendencies in the back of our minds when assessing current potential. Seasonal chart below courtesy www.equityclock.com

 

oil-seasonality

More significant than seasonal tendencies are support and resistance points on the charts. As you will note on the chart below – there is a significant neckline resistance at or around $52. This ceiling has been incredibly consistent for WTI. On the positive side: $52 is clearly defining a neckline of a bottom formation. You know that I don’t get hung up on the “name the formation” game—but the WTI chart is looking very much like a complex Head & Shoulders bottom. In order for the formation to complete, it MUST break $52 and hold above that level for up to 3 weeks.

oil

 

The daily chart below shows the various studies I like to look at when getting down to the nitty gritty of a play.

oil-short

Bullish factors include rising moneyflow (top and bottom panes), rising RSI and MACD (intermediate termed momentum studies), a near-termed turnaround on stochastics and WTI’s support by the 200 day MA.

Negatives on the daily chart include the proximity of stochastics to an overbought level, relatively flat comparative performance to the S&P 500 (third pane from bottom) and – as noted above, a pretty obvious hurdle to cross at or near the $52 level.

 

I’ve mentioned numerous times that oil should hit $62 or so in the next 12 months. I wonder if the current excitement surrounding the recent OPEC deal will last long enough to see oil crack its $52 neckline.

Given the above positives (moneyflow, momentum studies), the negatives (seasonal factors and resistance levels), and the unknowns (OPEC members’ adherence to their own deal) – I’d give oil a 50/50 chance of blowing through $52 and holding at this time. As such, I think it’s best to wait and see if this rally will take oil out of the potential H&S bottom formation. If it does, I expect to enter the trade and look to see a $62 target. Given OPEC’s track record, I would rather wait for that neckline break vs.  guess that this time, it’s different.

Keith speaking in Toronto

csta-2

The CSTA Toronto chapter has asked me to speak next Tuesday December 6th at 12:00 noon. I’ll be talking about sector rotation. Everyone is welcome, and a small admission fee includes a lunch. The address is: 161 Bay Street Brookfield place – Front & Bay St – Suite 4300 (Bloomfield room)

 

8 Comments

  • Keith: Please help me understand the Equityclock charts generally as I know you use them often. I know you are not the author of the chart but since you use them presumably you have a good understanding of what they represent and how one interprets them.
    My query comes around to the fact that this chart and others that they manage, never come back to zero to reflect the relative strength or weakness in any particular month. Using the WTI chart for reference:
    – if we start at zero Jan 1, and we end Dec at ~13%
    – does this not imply on avg WTI should be up 13% overall any year, which I would suggest is not practical knowing oil oscilates over time.
    – I would have expected the chart to reflect the relative monthly strength relative to a starting point, in this case Jan 1
    Thanks

    Reply
    • Here is Jon Vialoux’s reply:

      The answer is somewhat complex as it has to deal with the mathematics behind it. The seasonal charts are derived by calculating the average performance of the investment being analyzed over the timeframe specified. So in the case of the seasonal chart of oil, the average performance over the past 20 years ending December 31, 2014 is shown. Think of it as the average performance of 20 annual charts summarized into one. We have made the decision to show an arithmetic average, as opposed to a geometric average, in part due to the simplicity of understanding, although we do look at both as part of our internal analysis. For a relatively stable set of returns, the full year results between an arithmetic mean and a geometric mean should be similar, but given the volatility in the commodity market in just the past couple of years, there have been differences (Oil – Arithmetic Average= 13.2%, Geometric Average= 5.7%). Given that the purpose of the seasonal charts is to derive periods, typically in the 3 to 6 month range, in which an investment performs well, the annual average performance is the least important takeaway. The value of the chart comes from deriving the direction of the trends that are average during the year. For oil, it tends to realize an average low in the first half of February and an average peak in the middle of September, although the steepest part of the curve is between February and May, resulting in the best and most frequent returns during the period. This broader average trend effectively bookends the summer driving season, which “fuels” demand for the commodity. The average return during this seasonal run can be derived, approximately, by calculating the difference between the peaks and troughs. These average high and low dates remain consistent whether looking at an arithmetic average return or a geometric one.

      Jon

      Reply
  • Your previous blog suggested we may be due for the US market to have some correction prior to continuing into later Dec. In this blog the seasonal chart suggest Dec can be strong for oil.

    Are the US indexes impacted much by Oil? If so my question is to seek an inverse ETF that one can buy excluding the impact of oil, thereby capturing the correction of the broader market excluding oil.
    I do like HDGE but concerned that it will have oil equity that would move counter to the rest of the market, hence reducing the growth potential.

    Thanks

    Reply
    • Personally I wouldn’t short or inverse the market at this time. I think that the correction–which has pretty much already begun– will only take the market down a few percentage points. Markets tend to return to strength – seasonally speaking–after a short hiatus in early December.

      Reply
  • Keith: Would appreciate your thoughts on Emerging markets going forward. Are there factors that may make these countries grow faster than NA markets?
    Reason for interest is Sphere investments has released a new ETF product based off of an index created by FTSE Russell covering 150 companies in emerging markets. It is a product I am considering to invest in.
    Finally I would need to decide whether to purchase the fund in US$ or a CAD hedged version. If you were purchasing an investment expected to be held for a couple years minimum, that had either choice of US$ or CAD hedged, based on where you think the CAD is likely to go versus the US$, which version would you lean towards.
    I know you prefer not to provide opinions on individual stocks and I am not asking that question. It is on EM generally, which is a relevant topic for your blog readers, and secondly where the US$ vs CAD$ trend is heading.
    Appreciated

    Reply
    • I’m going to ask Jon Vialoux to answer this for a more accurate answer to your question re the equtiyclock charts–I’ll post his reply soon.
      As far as emerging markets–I will blog on that topic soon. Good idea.

      Reply
  • I been reading a number of articles about floating oil storage. The middle east is definitely selling their oil storage reserves to supplement their production cuts. This action will prevent oil from rising any time soon. However in other parts of the world floating oil tankers is on the rise. It is almost like a rebalancing from the middle east to around the world. With all the excess storage, I don’t see a shortage in oil for the next 2 years.

    Therefore I don’t think the idea of $62 in 2017 will occur.

    As far as world demand for oil, I suspect it will also rebalance around the world, which will not cause a rise in oil prices.

    The wild card is how long the middle east selling their oil storage can last.
    When it is gone, they will ramp up their production again, perhaps as early some time in 2017
    because they need the money to finance their social spending.

    I am predicting oil prices with stay around $50 for the next few years.

    Reply
    • Hey! Yer’ talkin’ like one-a them thar’ fundamental type analysts!

      Robert–you may be right, but there are LOTS of moving parts here-that why the technicals make it so much easier-plus the seasonal patterns into the spring. All in, if its going to happen, it will be by the spring. I am expecting to take the trade for a 10% piece of my platform.

      Reply

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