How High Can Oil Go?

Crude oil prices almost doubled since the February low. How much higher can oil rally?

The February 21 Profit Radar Report stated that: “Seasonality is strongly bullish until late April. For anyone interested in trading oil, this is a tempting setup to go long.”

The April 24 Profit Radar Report added the following: “Based on EWT, more gains are likely, however bullish seasonality is starting to taper off. Sentiment is near neutral. Based on long-term EWT, a rally to 50+/- followed by a significant relapse (perhaps even below this year’s low) is a real possibility.”

The long-term chart shows why 50+ was the up side target given on April 24 (red long-term trend line + 20-month SMA).

The short-term chart provides some additional details:

  • Oil moved as high as 49.56 on Tuesday
  • Oil turned overbought on Tuesday (vertical red line)
  • Oil spiked above the shorter red trend line, but closed below it (bearish throw-over)
  • Oil was unable to overcome bold red trend line resistance

All of the above is at least near-term bearish. Although bullish seasonality will reassert itself in June, the trend is lower until double trend line resistance is broken, or bullish divergences emerge at support.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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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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.

 

Why Oil Crash is Unlikely to Trigger Stock Market Crash

Falling oil prices in 2008 led to a stock market meltdown. It’s 2014, and oil prices are crashing again. Will stocks follow the 2008 script? We live in a complex world, and there are a number of correlations that may cause a surprise outcome.

This report was originally published in the December 14 Profit Radar Report:

There is some concern that the drop in oil prices will push stocks into a bear market, similar to what happened in 2008. We live in a complex world, and here are some of the ripple effects caused by falling oil prices. A bear market is not necessarily one of them.

Low Oil Prices = Economic Stimulus

According to the U.S. Energy Information Administration (EIA), the United States consumes about 11.5 billion gallons of gasoline and 567 million barrels of crude oil per month (based on 2013 data).

Since late June, the price of regular gas fell from $3.8/gallon to $2.5/gallon. A $1.30 drop in gas prices translates into a monthly savings of almost $15 billion for U.S. drivers.

Since late June, crude oil prices fell from $107/barrel to $58. A $49 drop in crude oil prices translates into a monthly savings of $28 billion.

Without help from the Federal Reserve, the oil market just delivered an ‘economic stimulus’ that could be valued somewhere around $43 billion a month.

Oil vs S&P 500

This year’s oil price collapse differs from the 2008 collapse relative to the S&P 500 (NYSEArca: SPY). In 2008, the S&P 500 topped before oil did. In fact, the S&P 500 recorded its all-time high in October 2007 and was already down 21% by the time oil topped on July 11, 2008.

In 2014, the S&P 500 recorded new all-time highs five months after oil (NYSEArca: USO) started to decline.

The chart below plots oil against the S&P 500 and shows that falling oil (NYSEArca: OIL) prices are not consistently bearish for stocks.

Falling oil prices after unusual spikes or bubbles (1990 Iraq war, 2008 commodity bubble – red shading) have a bigger effect on stocks than falling oil prices after a periods of consolidation (gray shading).

The 2014 meltdown came after a year of sideways trading. If history can be used as a guide, stocks are likely to hold up despite the oil meltdown.

Oil & the Hindenburg Omen

The ominous Hindenburg Omen showed up multiple times in December. The media has published numerous Hindenburg gloom and doom articles in recent years. The most recent Hindenburg clusters occurred in May/June and August 2013 without effect on stocks.

A number of requirements need to be met to trigger the Omen, one of them is a spike of new NYSE highs and lows.

Declining oil prices sent many energy stocks to new lows. Those new lows contribute to the Hindenburg Omen requirements and the resulting signal.

Oil & the Energy Sector

98% of stocks included in the Energy Select Sector SPDR ETF (XLE) are trading below their 50-day SMA. XLE is extremely oversold. The immediate downside from such on oversold condition is limited. A bounce in energy stocks will serve as tailwind for broad markets. UPDATE: XLE just deliverd the most bullish action since June. Will it stick? More details here: XLE Delivers Promising Rally

According to JP Morgan, oil firms account for 18% of the high yield bond market, which explains the 10% drop in junk bond ETFs like JNK (detailed analysis of JNK is available to Profit Radar Report subscribers).

The rest of the report along with detailed analysis for U.S. stocks and oil is available to subscribers of the Profit Radar Report.

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 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.