Oil Stock Prices Look Ready to Rebound to Me 3-30-20

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The chart shows oil prices divided by oil stock prices.

Of note, when there have been major spikes lower in this ratio, oil has consistently rapidly rebounded. 

The other instances showed quick gains of 50%+ in 3-6 months in oil prices.

So volatility is high, but the suggestion here is that short term trading systems can go into buy mode here with stops of course.

The chart shows that of the major lows on this chart, most of them lead to major advances of over a year in time.  The early 2015 was a quick 50% rally in oil followed by lower lows, but still a good short term trade opportunity.

Commitment of Traders Update - Stocks and Crude Oil

I have been following the CoT data on a number of markets closely for several years.  I spend most of my analysis effort on US stocks in general, and that is no different for CoT data.

Recently as the US stocks have traded in very tight range for months, there have not been major extremes in positioning long or short.  Currently as prices have recently made new all time highs, there has not been any major sell signal or accumulation of shorts by the "smart money". 

Generally the pattern is that smart money will sell heavily at the highs, sometimes with some divergence as is typical in markets, and sometimes after forced short covering.  But at our recent highs, the situation is either that they are NOT ready to sell en masse yet, OR there is a massive divergence period which would imply that the bull market is ending.  As always price action is the final answer.

I did want to alert readers here to what could be a very telling pattern and trade set-up in crude oil.  Coming off the March low in crude there has been a massive short-covering rally in crude oil.  The underlying position data is interesting and probably should be alarming for the bulls.  There has been NO increase in long speculative positions in the entire 49% rally off the lows.  In aggregate ALL the buying has been short covering.  This is occurring in a downtrend.  Short-covering in a downtrend with no new interest on the long side is NOT a healthy bull pattern.  And yet it gets WORSE for the bulls........

 At the March low the large speculators - which normally are most long at TOPS and which normally buy increasingly as price rises in an uptrend - had actually bought on the way down from November to March, to the point that their long position was basically equal to their all time high in net long at the June 2014 top before the massive decline.

And as already stated, they have not increased their long positions at all during the rally since March.  So here is the question........Is this because the CAN'T increase their long position?  There is a limit to the amount of funds they have, and certainly historical numbers can give floors and ceilings to the probable max capacity of $ deployment available. 

If the answer is that they can't buy more, then once this rally fizzles out, crude will certainly plummet again before the bear market ends.  The seasonal trends in crude are positive into the end of summer.  So it may be that oil holds up or sideways for a while before that happens.

The alternate possibility is that the funds have a "stash" of cash that they have yet to commit to the long side of the market, but given the way these things work, that seems like a very unlikely possibility.

So my suggestion here is to take all crude oil sell signals that develop according to your system or technique moving forward from this point.  I don't know how easy it will be to catch a top of this rally or if it already occurred.  But it may take a few attempts to get a position that sticks for a major decline.  I plan to speculate with put options at key points or signals moving forward.

Pete

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.

Why I Expect Oil to Rally When Everyone is Bearish

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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.

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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.

Time to Buy Oil or Speculate on Call Options

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The chart above is USO which is an ETF that tracks crude oil prices.  Obviously anybody at this point is aware that oil has fallen substantially.  That fact in and of itself is reason to consider buying oil or putting it on a speculative watchlist.

And when I say that "anybody" is aware of crude's decline at this point, I can say from experience in recent years of market cycles, that there are certain social "tells" that are pretty raw psychological indication that a trend is near its end.  Dependent upon your social circles, and how much you much interact with "the public" etc, you may be able to get significant information from just making note of ANY comment on a particular market by "the public".  Recently, within the last 3 weeks, I have heard people comment how low gas prices are - people that I have never heard mention prices of anything in any other conversation.  Market prices are not even on their radar. 

So if you think about the herd psychology and obviousness of the trend which must be occurring for their brain to now verbally note this in a group of others, where the potential for criticism or confrontation of significance exists, it seems to me that this is a very REAL and astute indication of the end of a trend, when the "dumb money" is compelled to note it.

So this is the current backdrop in which we find oil/energy prices.

Now we currently have other technical indications that the trend is ending. 

There is triple time frame stochastics bullish divergence (weekly, daily, hourly) at the current low.

There is daily time frame MACD divergence at the current low.

The recent consolidation on the last couple weeks formed a triangle, which typically is a pentultimate price pattern, meaning it occurs just prior to the last move of a trend.

There is now substantial Money Flow Index bullish divergence (which takes volume into consideration) and the trend in money flow appears to be turning up.

So moving to the chart above, there has been a moving average crossover of the money flow index after an extreme oversold reading with bullish divergence.

AT A BARE MINIMUM if you are short oil or energy at this point, I suggest you cover the position.

If you are an options speculator, I would suggest $19 or $20 strike calls with a few months until expiration.  A very simple, and in my estimation a well in excess of 50% probability of winning trade, would be to buy an April 20 strike call on USO and to put in a limit order to sell it at 100% gain.  Let it expire worthless if the order is not filled, or exit at expiration with the value in the option if the 100% gain is not hit in the meantime.

Another similar play would be to buy the October 20 strike call and to hold for a 100% gain with the same exit contingencies just noted in the previous idea.

If you make a trade on this and want follow up analysis or help with fine tuning the exit, then comment here or email reply to me and I will follow up on this with you.

Pete

Multi Market Update

9-29-12 Market Update

The video covers stocks, bonds, gold, oil, CoT data, AAPL.  Tighten stop or exit long equity holdings.

A Look at Market Psychology of the Recent Past and Present

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I have been thinking a good bit about the action in gold the last couple months and trying to look at it from different angles. The chart above shows the CRB commodity index at bottom with wheat, oil, and gold prices above as well as some notes of what I believe the general crowd psychology was at some points in the past.

I can clearly recall news stories about third world starvation and global warming in relation to the soaring grain prices last year near the commodity peak. There was some backlash against use of food based fuels like ethanol from corn and sugar, etc. While all these things may be sensible or even true, it only helped to explain price behavior in the past. What most people do is to assume that the same trends will continue into the future. As a contrarian trader or investor, it is important to learn to recognize consensus opinion and behaviors and willingly act against them. For anybody who pays attention to this type of thing at all, I'm sure you can think back on what the buzz was near the high points of certain commodities over the last year.

Well despite the commodity index now being well off the peak, there is a resurgence of inflation fears with primary concern over monetary inflation and the death of the dollar. This has focused the commodity world's attention on gold. My take is that this could very well be just another successive inflationary peak in a longer process of fundamental deflation.

It is not clear cut to me though because when commodities break out to all time highs, they enter a very strong technical position with no overhead resistance to speak of. So maybe this is the early stages of a long and large move up in gold. But from a crowd psychology standpoint and look at measures of real money sentiment, I tend to think that it is more likely just another domino in the line.

Stocks and commodities tend to advance together over the long term in general. However, there is a key difference in psychology at extreme points between the two. When stocks advance to bubble levels the crowd is euphoric and happy about the high valuations. However, as commodity price reach bubble levels, fear takes hold. Fear of famine, shortage, etc manifest at commodity peaks while it is utter complacency at stock peaks. So the difference in psychology may be why we see stocks top out before commodities often. They are both advancing, but then as commodity prices get so high, the general climate shifts towards fear. Then stocks come down on the fear while commodities blow off to higher highs on the fear.

For those familiar with Elliott wave theory, you know it is a result of crowd psychology. So while prices may exhibit identifiable patterns, larger degree patterns will have identifiable psychological/social trends that happen with them. A correction of a larger trend in its simplest form is said to be a 3 phase move (i.e. down up down, ABC). In looking at the crowd psychology of the recent bear market and the advance since, I would say there have been 2 distinct phases thus far: a progressive fear of and recognition of deflation, and now a directed social effort to combat that and re-emerging fears of inflation. I personally expect there to be at least another reversal of the psychology back toward the deflationary side before any great buying opportunity comes in stocks. Maybe that will take the stock market to new lows, maybe not, but I expect it to take stocks down quite a bit lower than they are now.