Oil Outlook

September 22, 2023No Comments

Hello and welcome once again to the Smart Money Dumb Money Show. And I am your host, as usual, Keith Richards. I’m President and Chief Portfolio Manager of ValueTrend Wealth Management, and I’m a technical analyst. And today we’re going to talk about what else? Charts. We’re going to talk about oil today.  Why? Because oil’s been going up. Okay, some of you didn’t notice? Perhaps a few of you live under rocks or live on the moon and you may not have noticed oil prices going up. I mean, heck, you even notice it at the pumps, so you got to see it somewhere. But oil prices have been going up because many of you will be aware that OPEC has been pushing to cut production. And one of the reasons behind that push is because sooner or later Saudi Arabia is going to issue shares and make public their state-owned oil company known as Saudi Aramco, which is now strictly state-owned.

But when they bring it to market, I’m sure there is a little bit of incentive for them to continue keeping oil prices high so they get maximum dollars for the shares. Isn’t that what every new share issuer does? These guys can manipulate a worldwide commodity price, and there’s no doubt at least some factor of that potential share issue coming that is driving them to keep prices tight. So keep that in mind. But we’re going to look at the technicals behind oil and oil stocks today to decide how much more upside oil might have. The other thing I want you to keep in mind before I bring on the charts is that oil has two seasonal periods. And remember, oil is just a tendency. It’s not an absolute. Charts are still not absolute, but they are a far more reliable indicator of what might happen to stocks or commodities, whereas the tendencies of seasonal trends rely on certain factors to repeat and things are always changing.

I do want you to keep that in mind. But oil has been one of the most reliable commodities or sectors of the market insofar as the accuracy of the seasonal trends. So the two periods of time that oil can do well and then peak are coming into October, that’s a peak period. And coming into May, that’s another peak period. And right now I’m recording this just coming into the third week of September. You’re probably watching this at the end of September, but it’s give or take a week or so before you see this video. And we’re just coming into October. And October does tend to be a peak period. Prices go up over the summer in oil and peak very often in October. So the charts are going to be our truth tellers today, not the seasonalities, but I want you to keep that in mind too.

There’s the Saudi oil company’s new issue coming soon, and then there is the seasonality tendencies of oil, those two factors are in the background, and I want you to keep those fundamental factors. Alright, so now let’s look at the charts and I want to also mention that if you go back over the past year, you guys know that I have been pounding the table to buy commodities and in particular oil. So I like to say that I was right because it’s always fun to say you’re right, but I was, and the factors were there to drive oil production to a point where it would be contained for different reasons, including the Saudi Arabia reason, but also the demand because a lot of the stuff I talked about earlier, for example, this year was that the government mandates to move towards clean energy has been extremely pie in the sky.

You’ll notice I’m not using any swear words here, but I would if this was not such a public recording. It has been nothing less than ridiculous to expect the world to adopt clean energy, which, by the way, and I’ve argued this on other blogs and whatnot, is not necessarily all that clean (or efficient). But that aside, there have been many reasons for oil to go up, including rising demand as the world population grows because we’re just not going to meet it with electric cars and windmills. So let’s talk about what’s next though. And I am looking at a daily chart here. So we could look at a weekly chart, but I really want you to see close up some of the numbers. Now I haven’t drawn any lines on this chart, but you can see that somewhere around 82 or so, 83, there was a point of resistance that had not been broken for much of this year and it had been a minor support area, but definitely a major point of resistance around $83 that was broken and it was broken with chutzpah, with real gusto.

So you see a strong move up, a short retracement, close to the neckline, and then another strong move up, a parabolic move. So that’s good, but we’re coming into another level of resistance and if we draw the line across here, you can kind of see it’s around 93, 94, maybe $95. Alright, so let’s keep that 93- ish level in mind because we’re just coming into that price as we see on the screen here is around 90 bucks, 90 and a half dollars as I am recording this. And I don’t know what it’ll be by the time you’re looking at it, but there’s no doubt that we’re coming into a very significant level of resistance. And why I think it’s very significant is two things. One is that the move was parabolic, the move was sharp to this level. So there’s no doubt it’s overbought and you’ll see this on the price indicators in a minute, but you’re facing this, but you’re also facing an old neckline before oil topped back in 22.

So that’s a pretty strong case for some pushback by the market once you see around 93 or so on the chart. So keep this in mind, you’ve got a few factors here, one’s positive with Saudi Arabia, which may be holding back on production to keep prices high for their new share issue. But then you’ve got some other factors too, such as seasonality and an overbought market. So let’s take a look at the indicators one by one. I’m going to cover money flow a couple of times, but let’s look at the chart and money flow, which is kind of a super fast indicator of how fast money is moving into oil. And you’ll see the cumulative line in a minute, but you can see it’s a pretty whippy indicator and it has been overbought for a while and that is seen on the chart money was moving into the WTIC.

And it shows here it moved at a very high rate. Now typically these levels of high money flow momentum don’t last. You can see that on the chart they eventually round over and fall. So let’s go right to the bottom of the chart and this is the cumulative money flow. Alright, so you can see it’s done really well. It’s broken out of a pretty flat zone and people have been piling their money into oil for good reason. As I said, I called this early so I get to take the bow here, but it doesn’t surprise me, but it’s also a very good thing if we looked at a weekly chart, which we’re not looking at right now, you would see that this cumulative trend is looking pretty good and I think it’s going to last. But if we look at another momentum indicator of money flow, which is MFI (Money Flow Index), it can be very accurate when it looks at peaks and troughs.

And again, this is only a daily chart. If you look at the weekly chart, the money flow index is not quite overbought, but it is most certainly on the daily chart. So the weekly chart is not overbought definitely is on the daily chart. And so that’s another indication that maybe at least with the volume of dollars going into the trade, it’s getting a little bit overdone. Now let’s look at the price. Well, the quickest-moving indicator we have is stochastics. And you can see it’s just like for money flow, what Chalkin’s indicator is, it’s pretty darn fast. So it’s up and down like a toilet seat. And here we are again, it’s pretty overbought, but RSI, which is more of a mid-range, it’s a 14-day look-back period here. It’s not super quick moving as you can see, but it can get overbought. And when it’s coinciding with the stochastics overbought, and it’s been overbought for a while, probably an argument that this $93 level is possibly going to be a point where it either doesn’t make it there or it hits it or close to it and rounds over for some period of time.

And then finally we’ve got the more significant indicator for momentum, which is the MACD. Now it’s looking great, it’s not showing any signs of rolling over like here and here where you get the negative crossovers and it could head up further. And in fact, I believe that it will, you’ll see the MACD pull back a bit, but it’s making higher highs and higher lows and all that good stuff and it’s not crossing down below the trigger line. So as far as I am concerned, the big indicators such as cumulative money flow, MACD, and that kind of thing are looking okay, but the near-term look is for some resistance at $93 and I think there’s enough proof. Finally, one other big-picture indicator is that this is the price of WTIC on a relative basis to the movement of the S&P 500.

You can see it’s been an outperforming sector as I suggested it would be several months ago. So, this is a chart that’s telling us that oil’s coming to a point where it may see some trouble possibly by the time you see this video. And I think that trouble will be short-lived because there’s possibly a reason to go through 93, but never say never. I’m just going to go with what’s happening. But I want to pull up a chart of the stocks. So XEG here in Toronto covers a lot of the stocks that you and I might own. So we’ll just apply the same chart to the stocks and you can see, well lo and behold, there’s an old resistance point that is being challenged right now, and so far not very successfully as you can see. And money flow, just like we talked about on the WTIC chart, went from an overbought to now it’s looking a little oversold, but it fell as that sector became overbought.

You’re seeing early signs of the sector rolling over right now. Okay, stochastic, for example, the fast-moving indicators rolled over. So it was RSI, which is kind of the mid-term indicator. MACD though is still in pretty good shape. Yes, it’s crossed the signal line, but I’m kind of a trend guy when it comes to MACD and it looks okay. It looks like it’s probably going to have a little bit of pullback and it’s already starting to do that. And you can see that the money flow index on this ETF is pulling back. So just keep in mind that the stocks, and this is a representative of the group of producers and there’s all kinds of big cap and small caps in there, but it’s a representation that it’s not so successfully challenging resistance. So will it break through this old lid?

I think it will at some point, but for now, we’re in a crummy seasonal period. We’re in an overbought market and we’re starting to see some indicators suggesting it deserves a pullback. So I’ll leave it at that as far as oil. Now, just on the subject of clean energy, because I mentioned that clean energy is not as realistic, at least the goals of governments who follow the World Economic Forum guidelines, which any of you that read my blogs – you know where I stand on that organization and what they’re trying to do to the world, but whatever the case, their objectives is to convert everybody to so-called clean energy. And again, I’ve written blogs on clean energy not being so clean, but you can look those up. That’s not today’s subject. But what I do want to look at is that sector now here is an ETF that a lot of people may be aware of.

It covers the solar and other type of you know, windmill-y type of clean energy providers. And you can see that this sector has fallen like a brick as oil over the same period that oil has gone up. What’s interesting is I had a client probably about a year or so ago, leave us because we refused to become ESG investors. And so she went off and literally bought this stuff and well, there you go, good job. Whatever the case. It’s important not to follow themes on the market because you don’t make money on themes, you make money on what’s it doing, not what you think it should do. And that was one of the first things I learned from Ralph Acampora. So, what we are seeing here is some support possibly, but you can see this recent low is taking out the last low on the daily chart.

I would like to see if clean energy can find a base here because if we start to see some rollover from oil, you may see, you *may see* clean energy stocks, pick it up a bit. That’s not a prediction, I’m just pointing out that the sector is a little oversold. It’s starting to recover on the money flow thing. But you can see stochastics, RSI’s coming off of a very deeply oversold area MACD’s hooked up. You know, there the cumulative volume is not picking up at all. And, there was an oversold MFI signal. So all I’m saying is that I wouldn’t buy this ETF and I wouldn’t buy this sector until I saw very definitive signs of basing like you had here where it went up and down for a while and eventually started to move up. You can make money on that as a trade.

See if you can get back into the $80 area. It’s not showing signs of really good basing action yet. But I just thought I would share that chart as food for thought because if I am a little concerned about energy, then maybe there’s an opportunity on the other side, which is the clean energy side. So case in point, Craig and I, by the time you have seen this video, have reduced, not eliminated, some of our oil producer exposure. We have had about 10% direct exposure to oil stocks and about another 10% indirect exposure through different things like pipelines. So we are putting our money where our mouths are, so to speak. We’re starting to sell out of the sector a little bit, at least take some profits. We’ve made lots of money on it for the portfolio. We’ve outperformed the market for this at least recently.

And by the way, over the long-term, you could look at our numbers online, but this is one of the things we do is we take profits when we see something has worked out and hit our targets. And these producers have hit our targets. Will they break through? That’s to be seen. That’s why we’ll keep some there. But we also want to take some profits because remember the old Wall Street adage, “Bulls make money, bears make money, but pigs get slaughtered”. We don’t want to be the third category, we want to be the first or second. So let’s end the video with that. If you have any questions, as always, you can post them to my blog and I’m happy to answer them. We have an ‘Ask Me Anything’ that will be by the time you see this video out on a video and coming soon. So I hope you get a chance to watch that. And I think there were some questions on oil that I’ll be happy to address. Thanks for watching and we’ll see you in a week.

 

Never miss another video!

Get Smart Money Dumb Money videos delivered directly to your inbox.

Recent Posts

Keith's on Demand Technical Analysis course is now available

Scroll to Top