Hello, and welcome once again to the Smart Money, Dumb Money show. And I am your host, Keith Richards, I’m president and chief portfolio manager at ValueTrend Wealth Management. And today we are going to be answering a question that I have been asked many, many times over the past couple of weeks. It’s December the third today, Friday, December the third. And we have seen a bit of a COVID-inspired market crash. Now I will point out that about one week ago, actually, Wednesday, the final Wednesday in November, I posted a blog basically predicting that we were going to see a big wave of COVID and market reaction around that. I didn’t think it would happen so fast, but that’s the way markets work these days. If they’re going to happen, they happen fast. So, one of the reactions over the past number of weeks leading into this change in attitude by the stock markets has been a sell-off in oil.
Now oil has been the big winner and anybody that has been watching this video series or reading my blogs at valuetrend.ca will know that I began pounding the table on oil and materials a year ago, like literally, September of 2020. And that’s when everyone was enamored with technology stocks. And I felt that there was huge value and I particularly pounded the table on energy. So that means natural gas and oil. I shouldn’t just say oil. And, my target at the time, you got to remember back then oil was trading at something like a 40 or $50 a barrel. And my target was to get into the $80 area and that’s where it got. Now since it hit its peak of $80, about a week or two ago, we saw it fall from that lofty height at one point hitting in the high sixties. And it’s certainly settled into near that around 70 in the $70 area.
So the question is, is that it for oil? Is the bull market over? Are we about to head into another rotation where we move out of oil and into something else? Well, I’m going to answer that with a bunch of charts as I always do, but just from a perspective, whenever you have a massive rally on anything, you should get pullbacks every once in a while. So we do have to expect that, a rally from 40 to $80 might be proceeded by a or be led by a correction down to $70 or so. So this is not overly surprising to me. The second factor is that during the winter up until February, actually energy can be a little bit weak from a seasonal perspective. So again, this doesn’t surprise me. And of course, with the COVID announcement, which by the way, um, what do they call it?
Omnicon sounds like one of those robot things that the kids play with, it goes from a car and turns into a giant robot. Um, this is I’m no expert, I’m not a biologist. So I’m stepping out a little bit here, but from what I understand, this is the spread is certainly going to happen, but it’s apparently the symptoms aren’t as great. So it may not be the big ordeal or maybe it is, but whatever the case, there’s, an abatement in go outside type of stocks. And energy’s one of those types of things because people travel when they feel safe to go outside. Whether this carries on for too much longer, I don’t know, but what I will say is that generally speaking, there is a little bit of weakness anyways, in energy between now and February from a seasonal perspective.
And I think the COVID announcement coming out of Africa only enhanced that. So I’m not concerned. People are asking me, well, are you rotating out of oil, Keith? And my answer is no, because I actually have established that energy is going to be a pretty good play over the next year because, with the green deal that they’re pushing, the big problem has been is that North American governments, in particular, have jumped way ahead. They are throwing the baby out with the bathwater when it comes to this change in green energy. Yes, green energy is the future, but no it’s not happening in the next year or two. And when Biden in particular and Trudeau in Canada started, capping the production and taxing and shutting down pipelines and all these things, the two of them had been brothers from different mothers.
I guess you could say from the stupid decisions that they’ve been making, particularly Biden. Now he’s asking to other nations to provide them with the very thing that he was trying to control and eliminate, which just shows you poor planning is what I’m saying. So energy with us for awhile, it’s not going to take, anywhere less than probably five to 10 years before we see any meaningful transition. So in the meantime, we gotta use this stuff. And so my view is that because of all the capping of shale and whatnot, that they did you probably in for high oil prices for awhile. And therefore, I think oil is a great trade over the next number of years. And I mean, natural gas as well. By the way, natural gas has some benefits as well because natural gas is part of that green energy move.
It’s a better transition to move into natural gas. and then to just fully hope that you’ve got enough windows going to provide us with, with power and heating. So let’s, before I get too deep down that pipeline, so to speak, tongue and cheek, let’s look at the charts because that’s really what matters here. I want to take a look and see if the trend for WTIC oil is in fact bearish. And I want to look at the stocks and then I want to look at those pipelines just for kicks and giggles at the end. So let’s, uh, let’s take a look and we’ll start off with the WTIC chart. And this is a little bit longer-term chart. It is going back to 2016, and I’ve got all kinds of squiggling indicators all over the charts, but I want you to note a few things that oil was failing somewhere around its old highs, although it had broken out from its old highs, at least recent highs.
And it’s fallen. Now basic trend analysis tells us that if you’re looking as a mid-term trader, which I am, you look at a weekly chart and you look at the highs and lows, the major highs and major lows on a chart. If you are making higher highs and higher lows, you’re in an uptrend. If it takes out the last low, and it breaks the 200-day moving average, you have the makings of a new downtrend. If it starts making equal lows, you’re in a consolidation. So where are we right now? Well, there’s the last notable low, which was during the summer of this year, 2021. And the most recent overall testing in that area has not actually cracked it. Oil, as you can see, is around 66 bucks pushing $70. It did break the 200-day moving average, which is this red line here, but the trend is still up and we must consider up until evidence proves otherwise.
Now from a danger perspective, danger Will Robinson, as a Lost in Space said, you do have a few signs. Well, first of all, RSI divergence. So if you know what divergence means, it is when the market is moving up, but there’s a general trend of the momentum indicator to be hitting on, not mean that oil is in fact losing some of its overall strength. You can see the highest peak on RSI was back at the beginning of 2021. And even though it has peaked a few times since, the peaks have been getting lower, that’s a bad thing. The same goes with MACD. So the MACD divergences are actually more significant to me than RSI divergence. So that’s a warning sign that perhaps oil is in danger of cracking that lower low, but until it does crack the lower low, which is around 60 bucks or so, a little bit over $60, we have to stay in the trade. So technically there are some danger signals to be sure, but the other, maybe more positive way of looking at it is that we’re seeing RSI, we are seeing Stochastics get into those low areas where they typically will see a turnaround. We’ve seen a break in the trend of, money flow as well. This is money flow momentum, and you can see that trend is broken and you can see money flow itself. It seems to have, this cumulative money flow seems to be a little bit in danger of breaking its trends. So there are some signs that perhaps oil could break, but I’m not going to draw that conclusion. And with the fundamental factors that I just mentioned, in play, as well as the good old-fashioned inflation, I really suspect that this is something that we, we want to give the benefit of the doubt on the trend before we react to these momentum indicators.
So that’s the oil chart. I’m just going to take a look at oil stocks now, and this is the good old I-Shares Canadian listed, oil producers ETF. And you can see it’s not quite an old resistance. Old resistance from 2017 and whatnot was in the 13, 12, high 12 to $13 area. It’s in the $10 area. It’s got lots of upsides, it’s past some recent significant resistance without too much developments, really only consolidating it’s not getting hammered. And as far as money flow goes, it’s in pretty good shape as you can see down here. So I’m still suggesting that the oil stocks are not reacting in the same way that energy itself is. And that may be a good sign that the producers continue to hold their own. Now let’s take a look at some pipelines because pipelines are not directly energy stocks, but they transport stuff.
Now, some of the pipelines aren’t producers, refiners anyways, but, let’s just make a broad, assumption that pipelines are more in the business of transporting this stuff. And of course, they’re going to fall off. So this is Pembina and we have a position at ValueTrend in Pembina. So that’s a disclosure there. Pembina, we’ve owned for a while and it’s done pretty well over the past year or two. The trend may be breaking and that’s, there’s the last significant low, and that is a definite test that we are seeing on Pembina, it’s playing with the 200-day moving average. So again, I’m giving it the benefit of the doubt because it hasn’t really cracked for three significant bars on the chart. And that’s one of my rules. But certainly, it’s in danger of that. But again, if we assume that COVID will cause this winter less travel and whatnot, then that might make sense that there’ll be less flow of the fuels, but then going into the spring and summer of next year, usually, after the February buy period from a seasonal perspective, I would expect that you might see this trend, continue but charts are charts.
And if this chart breaks its low, which is somewhere around $37 then we need to be pretty concerned. Now by a break, by the way, whenever I talk about a break on a chart, it’s three bars or more. Okay. So it doesn’t, you can get spikes. And in fact, here’s a little spike right here that you saw in Pembina. That is not a reason to trade it. You need some significant breakage, so to speak of a support level or a trend line before you become concerned. Alright? Now, we own Pembina, we do not own Keyera, but you can see it was hitting a level of resistance and it’s failing now. It has broken its last low. So there’s a little bit of danger on Keyera. I would maybe be a bit more concerned if I owned Keyera than say Pembina and Enbridge are definitely trying with this 200-day moving average, and it is definitely toying with its old lows. It is again possibly in a little bit more danger than the Pembina chart but it’s still holding its own.
So we’ll give it again the benefit of the doubt, but these are stocks that we want to keep our eyes on. It doesn’t mean that we need to sell right away. But I do think that so long as the lows are held on the charts that we were just talking about, we have to assume the trend is in place. And given that we’re seeing some signals from the momentum indicators and whatnot, we should definitely keep an eye on those levels. In the meantime, you have seasonals working against you. So there is a possibility of some more noise in the short-term for oil, but I would keep an eye on February and if oils begin to rally into the latter part of February and into March. It might be a sign that this was a correction within an uptrend. Okay. So I hope that helps. I’m suddenly seeing the sun come through and I guess the visuals on my video is changing, but, thank you for watching and we’ll be back next week.
