I noted a while back that I went long oil.

Here is my closing paragraph on the blog- which outlined my target, and stop loss strategy:

 

We view this as a seasonal trade at this juncture. Oil tends to be a good trade between February and May. Our commitment to holding oil much beyond the spring is low. Our price objective for WTI is to reach around $62 or so. This price objective is also fairly inflexible.  We plan on selling – ideally if/as/when the price objective and/or spring/early summer comes. A break much below $50 would inspire a sellout of the sector.

 oil

WTI just broke below $50 – which, as you will note from my prior blogs and the neartermed chart below, represents the approximate bottom of the trading range since late last year. As noted on my quote from above, we don’t want oil to stay below $50 for any material period of time.  Using my 3 & 3 rule,  on a mid-termed trade applied to a weekly chart—a break must last no more than 3 weeks and contain itself to within 3%  (see my book, Sideways). That is, a 3 week break, and less than a 3% draw through support. Approximating the 3 & 3 rule, let’s say that oil should remain above $48 and move back above $50 by no later than the second last week of March (March 24th).

oil short

Trading rules aside—here are my technical notes from the above short termed (daily) chart:

  • WTI has spiked below $50 for the first time since early December. It has found support at or above $5o up until now. Volume spiked on the breakdown.
  • RSI and stochastics are oversold but have not hooked up yet
  • Longer termed momentum via the MACD indicator has been negatively diverging since oil began moving sideways in December
  • Cumulative moneyflow (bottom pane) has been declining since December, but moneyflow momentum (top pane) shows a small degree of relief from that decline.

 

One final thought—You may have noticed that oil stocks  (the SPDR energy stock index, XLE) has underperformed WTI since December. While WTI crude traded range-bound, XLE declined. I looked back to their relationship since the last major peak for crude in 2011. One conclusion I made from this 6-year data sample was that oil stocks,  more often than not, lead the trend for WTI. The chart below illustrates XLE (red line) vs. WTI oil (black line). I drew vertical  lines when the correlation study went deeper than -0.25 (meaning they were moving quite opposite in price).

I also drew small trend lines on the chart lines to illustrate periods that created the non-correlated conditions that my vertical lines highlight. You will note that the XLE red line tends to diverge and lead WTI’s black line to “give chase” later – the  exceptions being at the far left side of the chart in early 2011.  On that occasion, XLE rose in divergence to crude, leading into a decline on both. Mid 2014 saw XLE rise and crude fall, also leading into a selloff. All other occasions saw oil stocks lead the way for a new trend in crude oil. This tendency for may be a negative for WTI crude prices, given XLE’s negative divergence against crude oil since December.

oil vs xle correlation

I’ll post again if I do decide to sell some or all of my positions. Meanwhile, it’s only been one day of the break in support, and crude is oversold. For this reason, it’s too early to panic.

Please note that I will not post a blog on Monday due to travel, but expect to post a new blog by the middle of next week.

 

11 Comments

  • Hi Keith,

    Thank you for sharing your 3&3 rule. I’m sure it can help prevent retail investors selling their stocks in a panic only to see their stock price recover within 5-10 days.

    Reply
  • Good rules and discipline Keith . Some panic out there. Media only mentions oil when it goes down but fails to mention the entire commodities complex is down (just like in 2nd half of 2014). Hmm…I wounder if the decline in oil price has more to do with the USD moving in anticipation of higher rates. Sure there are specific fundamental stories related to each commodity (potash over supply, oil over supply, etc). It seems to me that the individual fundamental stories are factored into the respective commodity price levels, but the intermediate commodity price trends are being more influenced by the USD especially when there is correlation among commodity trends. For the media though, it’s not as sexy of a story.

    Reply
    • That’s an interesting perspective Ron–I certainly agree that the USD ties into commodities–horse or cart..I don’t know which comes first–thanks for the food for thought!

      Reply
  • Hi Keith,

    Excellent post, as always. I have a question on your 3×3 rule from a different angle. Do you use a similar type of rule when deciding when to buy a stock? For example, if a stock pushes through a previous point of resistance, do you wait a period of time (ie. 3 weeks) or for a significant enough move (ie. pushing more than 3% above that resistance point) before you buy, in order to validate that move? And would today’s further move down in oil mean that you are lightening up your oil positions?

    Reply
    • Good questions Paul
      First–yes, I use a 3 x 3 rule to buy through a breakout. Also–depending on my expected time frame to hold the position and how volatile I expect the stock to be, I use either a daily or weekly chart–so it can be 3 days, or 3 weeks on a breakout (upside or downside). For example, oil and gold and tech stocks are more volatile than say utility, Cdn bank or a bond ETF. So I will use a 3-week rule for the more volatile stuff just to give them breathing room, vs. 3 days if its a bond trade.
      As far as the current situation for oil–it has not yet cracked $48 which is my allowed amount of leeway–but it is getting dangerous. So I will play it as it happens, but not out yet.
      Not to sound too promotional–but might I suggest reading my book Sideways? It fully describes entry and exit rules that I like using –I believe you would find it useful.

      Reply
  • With a break below $48 today on WTIC, I’m keenly watching XEG support at $12.25 and possible $11.75.

    Looking at XEG oil stocks appear more like a buying opportunity, but WTIC on the Daily chart has not yet found support.

    In this context, I am *hoping the stocks are right and oil comes around as I hate getting flushed out of a position only to see things settle and rebound. XEG has me Feeling it may be too late to cash in on this oil pullback.

    FWIW, I note Goldman and a few others are not seeing this oil pullback in as poor a light as the herd.

    While the weekly charts look quite similar, would you care to comment on the Daily Chart’s slight divergence between XEG and WTIC?

    Reply
    • Hi Bob–oil is trading around $49 now so I still hold it according to my trading rules (see prior blogs).
      Re your comment of XEG (producers, service co’s) diverging–sometimes commodity orientated stocks will lead the commodity as investors look past the current prices of the commodity with an eye to its future pricing. So if traders feel oil will be higher in a few months, the producers, which would lag in profits but ultimatly benefit, may move ahead of oil prices
      BTW–we are having a bit of trouble with our blog site, but I hope to have a blog posted that might interest you on oil either late today or friday–it will contrast and compare WTI crude oil with the tSX–which as you know is influenced by energy.

      Reply
  • Always appreciate you sharing your thoughts Keith. It looks like oil has bottomed and is headed back up again – in line with seasonality. Perhaps we’ll have upside until mid Apr/May. Would you mind sharing how far up you think crude prices may go? Thanks much.

    Reply
    • I still think there is a decent chance to see $60 on WTI or a bit more than that by June

      Reply
  • PAY TIME FOR ZJN.TO ?. AT LEAST THAT IS WHAT DON VIALOUX IS CHARTING ON TIMMING THE MAKET TWITTER’S BLOG. (ANY COMMENT ON ACTUAL RESURGENCE ON OIL)

    J.P.

    Reply
    • Yes, the seasonals should be good for the sector–and the drillers in particular. We hold some drillers directly and an energy ETF. We will hold to late May or perhaps a bit longer. It got oversold, probably a good entry point now.

      Reply

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