Monday, January 26, 2015

What to Expect From Here in Oil Prices


I have made several posts recently regarding oil and energy prices and some individual stocks in those industries.  The reason for this is the extreme position of crude oil and the potential profit that can be made on a turn up in oil.  It is not every day or week or month or year that major markets experience the type of dramatic re-valuation in prices.

Based upon history we know that the greater the bear market, the greater percentage gains we expect to make in bull markets, and the more violent the initial thrusts off the low tend to be.  So I am personally looking to catch a shorter term thrust up in the coming days or weeks.  Then my expectation is that we are likely to see a major bottom or bear market low occur within the next couple months.

I have gone back through the history of crude oil prices and made some observation regarding major bottoming processes.  Here is a quick summary of what I believe is important:


  • The winter (Nov-February) has seen some of the most significant bottoms in history
  • There was often a violent rally lasting a week or a few weeks off of the momentum low (low in indicators) which was followed by a modest break to a new final low within 1-2 months later
Given the current position of oil prices is believe we are very near the beginning of the expected violent rally off the momentum low.  Then I would anticipate a retest and or break to new lows over the next several weeks, with February or March being the expected months to bottom.

I have also suggested that looking at energy equities that are not confirming moves to new lows in oil may be the best speculative opportunities at this point.

I recently posted about CHK and it continues to look like it is just resting below a short-covering breakout point which may produce very nice short term burst higher if oil does indeed strengthen even for a week or two.

If you have questions about how to navigate oil and related issues currently, reply or comment and I will try to assist you.


Thursday, January 22, 2015

SLV Option Update Heading Into Jan 2015 Expiration

As a follow up again to the current call options I am holding in SLV, I have Jan 30 expiration $17 strike calls.  They were purchased for 0.13 per contract on 12/19/14.

I just exited about half of those contracts for 0.71 which is about 440% gain.  I am holding the other half with a limit order to exit at 1.43 currently.

Currently the hourly charts of SLV are demonstrating loss on momentum and some divergence.  And given the fact that SLV is not too far from the 17 strike, it would be a shame to hold the whole position and see a pullback into next week basically take at 400% gain down to nothing.  So by exiting here I have guaranteed a profit on the whole position, and am awaiting my limit order to hit or expiration to come at the end of next week.

I made a post here linking to a TradingView post I made about SLV noting that it may be set for a vertical rally.

I exited the other Jan $15 strike calls on expiration day for about 150% gain.  They were purchased for 0.75 per contract on 11/13/14.

I am just posting this here because for the individual trader, without automated trading decisions, it is times like these that will make or break the profit.  So hopefully by thinking through a scenario like this you can improve your own trade management ability and plan contingencies.

Pete



Wednesday, January 21, 2015

Stock Market Update

Based on my most recent post mentioning US stocks and the elevated VIX/VXV ratio, the 1-16-15 reversal was a potentially significant bottom reversal.  Given the overall bullish trend, it would make sense to be long with a stop below the Jan 16th low.  However, given the position of elevated volatility and a multiday attempted rally so far, a break below the Jan 16th low may lead to significant continuation to the downside.

Click on Chart to Enlarge

This chart of QQQ has the general appearance of a descending triangle, which most often is a bearish chart pattern, but not confirmed until a close below the lower boundary line.

There is a downward tilt to the pattern that makes it possibly a falling wedge, which is typically a bullish pattern in an uptrend.  So the key here from a charting perspective is whether the top boundary or bottom boundary trendline is broken on a closing basis.  The assumption at that point will be that the trend will continue towards the next support or resistance area.  In this case that would be the all time highs as resistance, and the October lows as support.

Pete

Tuesday, January 20, 2015

Why I Expect Oil to Rally When Everyone is Bearish

crude oil commitment of traders
Click on Chart to Enlarge

This is a chart of crude oil with Commitment of Traders positions below the price chart.  I wanted to give a little more detail on my perspective on the energy complex.

Of note on the large speculators positions, they have gotten progressively more short until early December which is their normal pattern.  They are the money that drives speculative trends.  Interestingly however, as price began to accelerate down ever faster at the beginning of December, the large specs have not increased the short position.  At this point there is a bullish divergence in the positions.  So crude oil has fallen 33% without the large specs increasing their short position.  This type of divergence is pretty classic as a trend ending pattern in underlying positions.

For basic understanding, first realize that the money that drives trends comes from somewhere.  And when the biggest money that there is, which drives the price trends, no longer follows the trend, the implication is that they do not have any more fund capacity collectively to participate in or push that trend.

So we have certainly ample evidence of that with a multi week massive decline but no further shorting by the large specs.  Additionally, there is now in the last few weeks at least a modest return to the normal commercial/smart money pattern of buying as prices decline.  So that indicates to me that the very directional commercial capitulation stage of this decline is likely waning.

Additionally, the daily MACD is demonstrating bullish divergence, and the money flow index is demonstrating pretty classic reversal divergence.  The money flow index basically looks at price and volume and typically demonstrates a substantial lead time with prices.

Taken together, it appears to me that energy prices (including natural gas, heating oil, gasoline) are likely to stage a rally very soon.  Whether or not it will be a bear market rally I don't know.  I would lean towards believing that because of no weekly time frame MACD divergence currently at these lows.  I think it will more likely turn into a volatile basing period or a rally followed by a failed breakdown to new lows before prices may bottom longer term.  But that is looking out kind of far for my purposes.  Really I am just interested in catching the next swing up, which I expect to be quite swift given the major oversold condition of this market.

XLE bullish divergence
Click on Chart to Enlarge

For those more interested in equities, this is XLE which is a major ETF covering oil and energy related stocks.  Notice how it has not maintained the aggressive decline that oil has.  And it also is displaying a drawn out bullish divergence on the MACD with a more classic chart pattern bottom with a failed breakout below the December 16th low, followed by an immediate reversal higher.  This indicates a stop running move in the market and that the buying interest was picking up right at that low as other (dumb money) was selling out or shorting in the break.  This makes the dumb money about as wrong as possible and the smart money about as right as possible.

For trading purposes the XLE etf may be a better purchase or near term speculation than crude oil itself.  That remains to be seen, but just understand there are several ways to participate in this probable reversal.

Sunday, January 18, 2015

OAS Call Option and Short Interest Analysis

Click on Chart to Enlarge

This daily chart is of OAS which is Oasis Petroleum, an oil correlated equity.  I have a order to purchase the February 15 strike call option.

According to data on Schaeffer's Research, there has been a near doubling in the amount of shares sold short from the Dec 1 to the Jan 1 reporting period.  As of the current data, there is over 24% of the float sold short.  This is obviously an indication of pessimism on the stock, which seems justifiable (and profitable over the last several months).  Nevertheless it does create a large potential supply of buying power in this stock if prices rally and put the shorts at a loss.

A bit of my logic on this is indicated on the chart above.  The light blue moving average is the simple average price since December 1st at which point 8.61 million shares were sold short.  As of January 1st 16.91 million shares were sold short.  So basically we have seen a huge increase in the number of shares shorted since December 1st.  And I don't know exactly were they were shorted, but just using the average price and assuming they were relatively evenly shorted during that period, then that would put the average price shorted at about 15.00 (or maybe 15.90 if using the high of each bar for the average).  So if prices rise above the 15.00 level, that would possibly put the average short position at a paper loss at that time.  And then any further rise will put those newly shorted shares at an even further loss, creating pressure to cover the position.  Covering is done by buying the shares, and so that would be significant buying interest forced into the stock.

Additionally, price this week did not even come close to making a new low for the decline despite oil's new low.  This again is a non-confirmation with the commodity that may be a sign of bottoming in the sector and relative future strength in this stock.  Furthermore, a move above the December 23rd high would be a stop loss point on the chart, and again, given the hefty short interest, may lead to a short covering burst of buying.  There is a large heavy volume unfilled gap down above that at 25.24.  If oil is bottoming here and going to stage even a bear market rally, that $25 level would be a likely target for OAS in my opinion for the coming weeks.

So my plan here is to buy the call with the expectation that we may see prices rally in the next 5 weeks and make a significant gain in the option.  If buying, a simple strategy could be to enter a limit order to sell half the position at 100% or 1/3 at 200% gain and then hold the rest assuming prices appear to be moving higher.  Then a more finely tuned final exit can be sought.

But the set-up here looks good for an equity purchase as well with the same overall trade logic.

If there are any follow up questions to this analysis or oil related issues, reply here and I will try to assist you.  I view this oversold oil sector and the XLE etf as a prime opportunity for profit at the current time.


Pete


Friday, January 16, 2015

CHK Option Trade

Click on Chart to Enlarge

I purchased a call option position on CHK today for 2.48 April 18 strike call.

CHK is an energy related stock, which is in the oil industry which obviously has been hammered down in price recently.

However, there are some signs that the oil downtrend may be near exhaustion, and that CHK may be one of the sector that is showing relative strength on the charts.

Notice that oil has been making new lows into this week.  However, CHK bottomed with a double bottom reversal on 12/12/14.  Now on oils push to new lows, CHK has held well above the the 12/12/14 low.  This creates a non-confirmation with the underlying commodity and is a sign that CHK is basing and ready for a move higher.

A subtle note on short interest is that during this downtrend, the short interest has consistently risen as CHK has rallied and then declined as price declined.  The same pattern did happen again as price rallied in CHK into late December.  HOWEVER, now that price has declined but did not make a new low, and there is the real possibility of a break above the December highs if oil strengthens, then it seems likely to me that there would be some short covering forced on a break of that price peak around 20.40 on CHK.

For stocks one could be long with a stop below this week's low, and then exit at a limit of 23.04, which is the fill of a large gap down.  That would be a solid reward/risk play, and one with a clear logic behind it.  I am in the call option with plenty of time for a significant move and, in my estimation, a very good probability that this option will at least double in price at some time prior to expiration.  The key will be to make a timely exit or scale out if prices do rise.


Let me know if there are other oil related issue that you would like looked at.

Pete

Thursday, January 15, 2015

VIX/VXV Above 1.0 - We Will Either See a Bottom or a Swift Sell Off

Yesterday the VIX/VXV ratio closed above 1.0 again.  I have highlighted this many times on this blog and you can search for that term on my blog to find prior posts and info on VIX/VXV and its significance.

Basically the market is at a state or near term heightened volatility.  There is an increase in "fear" or substantial near term volatility priced into the options market.  There are two outcomes that basically always occur after these signals.


  1. A significant bottom is quickly formed which often leads to a substantial rally and an important lasting low occurring in prices.  Often times from the first VIX/VXV close above 1.0 to the low of the correction is just a matter of a day or a few days.
  2. There will be an increased near term volatility with even greater % price losses than have yet been seen in the current correction.  

In either case, price may be near a low in terms of time.  But in the second case there may be a very significant downward price move prior to the low.

My personal perspective here is that with yesterday's VIX/VXV ratio above 1.0 concurrent with a price reversal in the session, a break of yesterday's low would basically be a "failure" of a bottom attempt and would be a sign of significant caution for bulls.  I would advise that if Wednesday's low is broken, a trader either be flat and awaiting another price reversal bar at a new corrective low, OR be short with a stop no higher than above the Jan 9th high.

If prices do continue lower from here I will be likely be more active in posting here in order to help you pinpoint upcoming market turns as they develop.

That being said, unless Wednesday's low is broken, yesterday was a bullish signal in the markets.


Pete