What is Driving Oil Lower?

OPEC inaction, decreased consumption, new extraction methods. There are many reasons why oil ‘should’ be down.

However, none of them is (or was) predictable.

For example, back in June the Wall Street Journal and Forbes reported that oil demand is rising. Oil traded above $60 a barrel at that time.

Back in October, CBS News asked: “Could an oil price spike slam the US again?” The question turned out to be a mute point.

If the direction of oil prices is so obvious, why do the media and analysts continuously get it wrong?

Forecasting prices obviously entails more than slapping a news event on a price event after the fact.

Seasonality is an ingredient of every Profit Radar Report market forecasts.

The September 27 Profit Radar Report warned that: “Crude oil seasonality is positive for a few more days before turning sour, so time is running out.”

The November 15 Profit Radar Report, the last time we looked at oil, stated the following: “We sold crude oil (USO) near 48 in October citing strong bearish seasonality as reason. Oil has dropped 20% since, and seasonality continues bearish until mid-December. Technical support is between 40 and 33.”

Based on technical analysis, oil is now in the general support area likely to spark a bounce eventually.

Seasonality is turning gradually bullish in mid-December, but the big seasonal buy signal won’t occur until next year.

Seasonality is not always correct, but betting against an obvious seasonal pattern (such as oil’s September – December rut) is like booking a Caribbean vacation during hurricane season.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Crude Oil Analysis Update

It’s been a while since the last free crude oil analysis (March 23: Next? A Crude Awakening for Oil Bears?).

The March 23 article noted that: “Commercial traders are starting to prepare themselves for further gains. Oil seasonality also suggests higher prices. Probably more important is a trend line that’s been important for oil prices for nearly two decades (this proprietary trend line and detailed oil seasonality chart reserved for subscribers of the Profit Radar Report). A move above this trend line is likely to trigger a rally.”

This important trend line is now in the rear view mirror, and I’m able to disclose it without conflict to my paying subscribers.

The green bold line in the crude oil futures chart below represents this trend line. It originates all the way back in 1998.

Since overcoming the bold green trend line, oil prices rallied as much as 33%.

Below is a summary of observations made in the Profit Radar Report since March:

March 29: “For aggressive traders, playing the long side (buy on dips) should ultimately prove profitable.”

April 8: “A close above 54.30 should bring more follow through gains.”

 

April 15: “Crude oil broke above 54 today. The breakout has legs as long as it stays above 54.”

May 6: “Oil prices are now gnawing on the resistance zone around 60. Yesterday’s red candle high may cause a pause. Next support is around 58.50, which could be an opportunity to buy.

Oil is trading around 58.50 right now. Based on seasonality, price may test support at 56 or 54.30 between now and mid-June (proprietary oil seasonality chart available to Profit Radar Report subscribers).

Overall, I anticipate oil prices to move higher as long as support at 54.30 holds.

Based on seasonality, buying oil ETFs like the United States Oil Fund (NYSEArca: USO) or iPath Crude Oil ETN (NYSEArca: OIL) before mid-June and/or around 54 – 56 (based on crude oil prices) is a trade worth watching.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Next? A Crude Awakening for Oil Bears?

After losing 55% in a matter of six months, oil has been flat for the last two months. Is it gathering steam for the next big move?

A volatile bottoming process is nothing new for oil.

The 1986 and 2008/2009 bottoming processes were volatile as well (2008/2009 highlighted by blue circle). There were many weeks of wild up and down swings.

The initial low wasn’t violated in a meaningful way, but there was also no meaningful progress for about three months.

Based on the 1986 and 2008/2009 script, the February 4 Profit Radar Report anticipated wild, range bound swings.

The VIX for crude oil (OVX – light blue graph) is about at the same level as it was near the 2008/2009 low. If the 2008/2009 Oil VIX high acts as resistance, down side for oil is limited.

The dark blue graph shows the net futures position (Commitment of Traders Report) of commercial traders.

 

Although not extreme by historical standards, it appears that commercial traders are starting to prepare themselves for further gains.

Oil seasonality also suggests higher prices.

The red and green lines are long-term Fibonacci support/resistance, but probably more important is a trend line that’s been important for oil prices for nearly two decades (this proprietary trend line and detailed oil seasonality chart reserved for subscribers of the Profit Radar Report).

A move above this trend line is likely to trigger a rally.

Before investing in Oil ETFs like the United States Oil Fund (NYSEArca: USO) or iPath Crude Oil ETN (NYSEArca: OIL), investors should know that futures based ETFs (like USO and OIL) are subject to contango, and may lag the underlying asset (in this case oil).

Although this wasn’t the case in February 2015 – when oil prices and USO/OIL gained as much as 24.4% before reversing lower – it’s always good to calibrate expectations.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Crude Oil and Energy SPDR ETF Gushing to Major Support

Crude oil prices have been gushing lower since their June high, down 20%. The same is true for the Energy Select Sector SPDR ETF. Those two charts show that the odds for a tradeable bottom are now above average.

Crude oil has plummeted from $107 to $84.

Are falling oil prices good for the economy or are they a reflection of a weak economy?

It’s a chicken or egg kind of question.

The media is certainly at a loss, as those actual headlines from 2011 and 2012 illustrate:

  • AP: “Higher oil prices threaten global economy” – March 10, 2011
  • Reuters: “Oil prices rise on economic optimism” – January 10, 2012
  • AP: “Higher oil prices offset worries about global economic recovery” – May 25, 2011

A simple look at a comparison chart (S&P 500 vs XLE) shows that oil and stock prices can, and often will move independently from each other.

Regardless on how oil prices affect the overall stock market, oil prices are at important support.

Crude Oil Support

The crude oil chart shows trade being repelled by red trend line resistance in August 2013 and June 2014.

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After a 21% drop from high to low, oil is sitting right above important support around 84.

Energy Select Sector SPDR Support

The Energy Select Sector SPDR ETF (NYSEArca: XLE) matched crude oils gush lower, down 20% from its high.

The 81 level offered important support in December 2007, March/April 2011 and February 2014 (blue dots).

Considering the steepness of the recent selloff and proximity to important support, there’s a good chance oil and XLE will find a tradable bottom somewhere around current trade.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Crude Oil Speculators Are All-time Bullish – Will This Sink Oil Prices?

Large crude oil speculators have amassed a record amount of long crude oil positions. This may mean that there are few buyers left, which may be troublesome for oil prices. Furthermore, oil prices are at technical crossroads.

The latest Commitment of Traders (COT) report shows that large speculators have never been more bullish on crude oil and are holding an all-time high exposure to the ‘black gold’ (hopefully it won’t disappointment them like actual gold).

The Commodity Futures Trading Commission (CFTC) COT reports holdings data for various energy contracts and most of them show large speculators are record long.

What does that mean for oil and gas prices?

There are two key components to the short-term oil outlook. Both of them are illustrated in the chart below, which plots WTI crude oil prices against the COT large speculator data.

When large speculators were ‘all in’ in 2011 and 2012 oil prices corrected. Not immediately but inevitably.
The red trend line magnifies the potential impact of the current sentiment extreme. Oil prices are at technical crossroads as trade hovers around this support/resistance level.
ETFs that are affected by this sentiment/technical analysis combo include:
United States Oil Fund (NYSEArca: USO)
PowerShares DB Oil Fund (NYSEArca: DBO)
Ultra DJ-UBS Crude Oil ProShares (NYSEArca: UCO) – 2x leveraged long ETF
UltraShort DJ-UBS Crude Oil ProShares (NYSEArca: SCO) – 2x leveraged short ETF
The trend line suggests that bullish and bearish forces are fighting a battle over short-term supremacy right around the 103 level.
As long as trade stays above trend line support, higher prices deserve the benefit of the doubt, but sentiment suggests that the we should see a notable correction eventually.
There’s one support level that absolutely must hold and a price target that – if reached – should be very damaging to the stock market.
A more detailed analysis of oil titled ‘Will $100+ Oil Be a Problem For Stocks & The Economy” offers an insightful longer-term outlook for oil along and reveals key support and resistance levels.

Will $100+ Oil Be a Problem for the Economy?

It’s summer and there’s usually a big buzz about gas and oil prices this time of the year. But there’s been little talk about oil’s quiet move above $100/barrel. In times past this has stifled the economy. What about this time?

“Higher Oil Prices Threaten Global Economy” – AP, March 10, 2011

This may be a headline of the distant past, but it was written at a time when crude oil traded just above $100/barrel. In fact, on March 10, 2011 crude oil ended the day at 102.58.

Oil above 100 usually captures the media’s attention one way or another. Some outlets consider it a sign of a strengthening economy, others a stone around the neck of car-driving consumers.

Interestingly, this time around, 105 oil hasn’t tickled the media’s reporting need yet.

Regardless of the media, there’s a worthwhile correlation between the S&P 500 and crude oil, and technical analysis suggests that crude oil prices are at an interesting junction.

The chart below plots the S&P 500 against crude oil prices and shows almost everything important there’s to know about oil right now:

  1. Crude oil prices just climbed above red trend line resistance (now support) at 104.
  2. Crude oil prices are also trading above longer-term dashed red trend line resistance at 96.
  3. Crude oil at 110 – 115 has coincided with stock corrections in 2011 and 2012.
  4. Important green trend line support is at 91.

Crude oil cycles don’t really support higher prices right now, but the chart shows very little bearish energy.

As long as crude oil remains above the solid red trend line, prices may reach the 110 – 115 danger zone that led to corrections in 2011 and 2012.

The dashed red and green trend lines will serve as important support in the weeks/months to come.

What About Oil and the Economy?

Oil is the only asset that keeps the Federal Reserve ‘honest.’ Past rounds of QE buoyed all asset classes. With the exception of oil, that’s exactly what Mr. Bernanke wants.

However, rising oil prices – unlike any other asset – are bad for the economy and may force the Fed to taper QE.

Oil is trading above various support levels and may continue higher, but oil’s quiet ascent has escaped the media’s attention. There’s currently no public pressure on Bernanke to curtail evil oil from pick pocketing American saving accounts.

Oil Flash Crash Erases 3.8% in 4 Minutes – Is This a Sell Signal?

Wall Street traders returning from lunch saw one of the most pronounced mini flash crashes in history. Within a matter of 4 minutes (between 1:51 –  1:54 pm EST) crude oil prices dropped 3.9%. The day’s trading range was 4.9%.

The swings were equally dramatic in oil related ETFs like the United States Oil ETF (USO) and iPath S&P GSCI Crude Oil ETN (OIL). The ripple effects were also felt in the broader PowerShares DB Commodity Index ETF (DBC) and iShares S&P GSCI Commodity Index ETF (GSG).

What caused this mini flash crash and is this a sell signal for oil?

What Caused the Sudden Drop?

Traders, analysts and regulators are still fishing for reasons, but there are only speculations thus far. An incorrectly entered trade (“fat finger error”) or rumors of a possible release of oil by the United States strategic reserves are possible suspects.

Is this A sell Signal?

Oil is not one of the asset classes regularly covered by the Profit Radar Report, but we can apply the same technical analysis methods used for the S&P 500, gold, silver, currency and Treasuries to oil.

The chart below plots crude oil futures prices against the 20 and 200-day moving average, prior support/resistance levels and a largely unknown but effective indicator called percentR.

We see that Monday’s quick dip pulled oil prices briefly below the 20 and 200-day SMA, which converged at around 96.50. Prices found support at 95 (green line), which is an area that buoyed oil prices several times before.

In addition, Monday’s drop triggered a bullish percentR low-risk entry. Only a close below 94.65 would negate the bullish low-risk entry.

Obviously, most asset classes are overbought due to last week’s Federal Reserve induced price pop and due for a correction. However, as long as oil prices stay above support at 94.65 – 95 any correction will have to wait.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.