Merrill Lynch Technical Analyst Bob Farrell once said that bear markets are characterized by an initial panic, followed by a reflexive bounce, then a final bear movement. Perhaps this plays into the Elliott Wave Theory of 3-wave counter-trend moves. Whatever the case, it is my belief that WTI and Brent crude are in a primary bear market. They both have broken out of a 3-year triangle to establish a downtrend. We’ve seen the initial panic move – as you no doubt have noticed. I believe that last week’s rally, which I have been suggesting on this blog was overdue, is really just a reflexive bounce within that primary bear market for oil. Oil was mega-oversold and needed to take back some of that excess. I believe that after the current rally (assuming it continues), things will get ugly again for black gold.
Martin Pring, by the way, once noted at a lecture that if a security becomes deeply oversold (from an oscillator perspective)–it usually indicates more pain to come. This, despite the potential for a near termed bounce. This plays into Bob Farrell’s observations of reflexive bounces within bear market trends. Today’s chart shows us the long termed (weekly) WTI chart above, where you can see support around the neckline of the 2009 bottom formation on oil. We’re bouncing off of that $54-ish level right now – note the lack of positive confirmations on the weekly momentum oscillators, despite positive daily chart oscillator confirmation (not shown). A rally could take us right back up to $70-ish, as marked on the chart. But the triangle you see on the same chart suggests a bigger picture bear. I’ll not be surprised to see $40 or thereabouts on oil before the end of the winter.
I’ve also posted a chart for the iShares Energy ETF below. This group could rally back from its oversold level to former support at round $16 but it needs to crack current resistance of $14.50 first. Not a bad trading potential for the short termed investor.
Personally, I have one oil stock in the ValueTrend managed equity portfolio. We sold the majority of our energy exposure in August. I will use the current rally to divest myself fully from the energy sector. Could I be wrong about my bearish prognostics prospects for oil? Sure! But at this moment, my focus is on favourable sectors such as technology and the US banks. I noted these plays on my BNN appearance on Friday. Here’s the Globe and Mail article and clip:
I’ll be back with my usual Christmas season special blog this Wednesday. I enjoy writing this one every year–this is the blog where I try to provide readers with an educational tidbit, and a bit of trading philosophy. Hope you have time to read it.
Meanwhile, 3 more shopping days ’til Christmas – so get out there and spend your money to drive those retail and consumer discretionary stocks higher!!!
10 Comments
Hi Keith,
Appreciate your insights.
Where do you see pipelines in all of this?
Merry Christmas!
Hi Paul
I own 2 pipes. Yes, they were hammered in the recent oil selloff–mind you, I bought some time ago so I’m still way up on the trade. But the ones I own (KEY, PPL) are not as exposed to oil ownership as the market has treated them. Technically, they have both been toying with trendlines drawn from 2009. My decision is to reduce my exposure on the current rally (per todays blog) over the coming weeks, but not eliminate it. KEY in particular looks to be a stable business model and well on trend – likely oversold substantially.
ANOTHER COMMENT TODAY FROM THE SAUDIS AND THE AGENDA ON U.S. FRACKING AND IRAN’S CHIITE OIL ECONOMY. MY LONG TIME FAVORITE T.A. BILL CARRIGAN (I MISS HIM IN THE INVESTOR’S DIGEST) PUT A SUPPORT AT $13.80 ON XEG.TO (2002-2014 CHART, 12 MONTH M.A. % STANDARD DEVIATION) AND $WTIC SUPPORT AT $72.00-$51.00 AND… $38.00 (CRUDE OIL MONTHLY, 1996-2014 CHART). AS FOR STOCKCHARTS CONTRIBUTOR, ERIN HEIM, USO-N CRITICAL SUPPORT WAS BROKEN AT 2009 LOW AND WEEKLY PMO TUMBLE LOWER SINCE THE PRICE TOP IN 2014.THEY EVEN SEE A REVERSE FLAG FORMATION ON THE DAILY ONE YEAR CHART WITH A POSSIBLE BREAKDOWN THAT COULD SPELL A MINIMUM DOWNSIDE TARGET TO… $14.00. FIBONNACI RETRACEMENT 101, IS THAT IT?
P.S.: NOT FAR OF YOUR FINAL TARGET AROUND $40.00 AREA ON OIL?
Thanks for the insight JP
Be sure to read my “Xmas” blog–posted tomorrow (Wednesday Dec 24th)–it is on the subject of setting targets. I hope you find it of interest.
Keith,
This is an excellent article. I just recently came back to following this blog and definitely missed it. What are your thoughts on the seven year business cycle. It looks like 2015 will be interesting. I hope your Christmas and New Year goes well.
All the best
Kevin
Keith,
This is an excellent article. I just recently came back to following this blog and definitely missed it. What are your thoughts on the seven year business cycle. It looks like 2015 could be interesting. Hope your Christmas and New Year goes well.
All the best
Kevin
Thanks Kevin, and welcome back.
the 7-year business cycle is more economic theory, but there are some ties to technical cycles. From a common sense point of view, cycles aside, we are overdue a 20% correction. The last one we had was in 2011. My 2 cents worth is that we’ll get such a 20% + correction after the seasonal best 6 months period ends.
So carry an umbrella – the sky might fall later in 2015! But…. like in 2011, if we get such a correction, it will all be in the backdrop of a secular bull market.
Thanks for your response. That is good to know. Sorry for the duplicate comments from above.
All the best
Kevin
Keith,
Thoughts on holding TRP for intermediate term? I’m underwater a little.
Thanks
Hanson–TRP is still nicely on trend on the weekly chart. It is bouncing off of the trendline-although perhaps in a bit of a symmetrical triangle right now. You don’t want it to break down out of the triangle, but signs are there that it will likely break to the upside. I’d stick with it and enjoy the dividend while you wait.
BTW–I’d normally not answer individual stock questions on this blog–but its Christmas!
Happy Ho-Ho!