Anyone want to "discuss" Oil? It is at a pivotal point!

[Mercury]

No matter how you trade nor how you analyse the market you must have a view of the long term direction of the market or you can't hope to take advantage.  Many traders will say that you should always trade with the long term trend (except when it comes to an end of course...).  Identifying these trend turning points are key for contrarian and trend traders alike and there may be one on Brent Crude emerging right now.

 

The big picture on Oil for me (assuming the Jan 2016 bottom was NOT the final bottom of the Bear) consists of 2 main scenarios:

1. That the June high was the top of the rally and the market will move steadily down in a 1-5 zig zag to a fresh bottom below the Jan 2016 bottom.
2. That the June high was not the top of the rally and we have 1 more major leg up to the $55-60 area, before the real drop begins

Note: if Jan was indeed the bottom of the Bear then a further pullback to, say, $40 could occur followed by a strong rally.  There is one additional scenario mooted by some that Oil will trade in a range roughly between $40-60 as the Saudis manipulate the price to keep the US Frackers under control.  I don't buy that final argument because there is no evidence over the last 100 years that anyone can control this highly speculative market via supply manipulation but that's up for discussion...

 

Under any of the 4 scenarios the market is, I believe, at a pivotal moment.  For all scenarios other than #2 above the market is likely to move below and close below the current price level (circa $45).  However if the market rallies from here without a close below $45 then scenario 2 is highly likely in my view.  Conversely a close below $45 eliminated #2.

 

Technicals

The Daily chart shows the scenario #2 EWT count plus a decent set of tramlines and note a junction of the lower tramline and a strong support zone (horizontal green lines) that also contains the Wave 1 top from the previous rally phase (blue label 1).  In EWT theory the market cannot close below the wave 1 top, hence a close below $45 negates this scenario and indicates a move lower.  Oscillator indicators are in or near over sold and there is a Positive Momentum Divergence with price.

 

(Note: If this support zone is broken I would anticipate a retest and then drop to the lower red tram line to the 4000 area)

 

Looking at the Hourly chart shows us how to play any rally from here (i.e. carefully!).  You have to wait for a confirmation of the bounce off the support zone and a break of the short term resistance zone (red lines) and the upper hourly tram line.  A break means a close above not a spike above and return.  A sustained break is likely to run quite fast so placing a stop-in order is the best way to ensure you catch it.  If the market does break lower your stop-in order will not be filled, so no loss.  Obviously the level you set the order at is key and there is no easy answer to that...

 

Note also positive momentum divergence on the hourly chart supported by RSI/Stochastic coming out of over sold area.

 

In summary a rally seems likely from here and a decent bet with stops close otherwise a break below is a Shorting opportunity that reduces our long term scenarios to 3, hence this is a pivotal point for the market.

 

Look forward to thoughts, especially alternatives or violent disagreement.

 



[donaldprice]

On the daily chart, momentum is still very much to the downside, however I do agree that short-term opportunity can arise from the hourly if their is a nice swing trade provided. However I will not dismiss the chance that this could revisit the $39 area or 50% retracement, but on a weekly time frame their is bullish momentum. Overall in terms of basic economics, unless their is some serious world-wide fiscal stimulus (don't count on it lol), and some serious growth occurs, then I think the price of oil will struggle.

[Mercury]

Hi , thanks for the thoughts.  Of course any rally could be a short term retrace before a further drop rather than a rally to a new higher high, we wouldn't know until we see it play out (let the market tell you as  might say).  I am interested in your point about daily momentum?  When you say it is to the downside do you mean it is below the median?  Most rallies start with momentum down, that is why I look for momentum divergence, which there is on the Daily.  It is not conclusive but it is indicative.

 

The very definition of a contrarian trend turn trade is to take the opposite position of the herd.  Most will doubtless see a continuation of the down trend, and they may be right (until they are wrong...).  The trick for me is to identify a turn early and then wait for confirmation before trading into it.  Key indicators are a break of support/resistance (and or Fib levels); a break of tramlines or other formations such as Triangles; A fit with EWT count both short term and long term; Momentum Divergence and ideally RSI/Stochastic concurrence and all of this on multiple time frames.  It has to fit with a long term projections and ideally with a fundamentals backstory but often these days fundamentals are subverted by the central bank and big business ponzi scheme...

 

In such a world technical analysis is all you have left really.

[donaldprice]

Well, looks like oil inventories have risen substantially again, which explains the current bearish view and the increase in net shorts by the hedgies as well as among others. With reports of now china dumping excess crude on to the world markets, not to mention an increase in US rig count and finally, just to remind us all again, that emerging economies and china and India also not consuming huge amounts as they used will increase the added pressure on supply. In terms of the technicals, we need to look out for the 50% fib levels from February lows. 

[Mercury]

Certainly seems likely .  Just as an aside, placing a stop-in order for a Long above the hourly chart short term resistance zone means I never got in Long, in fact the reverse with a stop-in below the recent low.  However there is strong support around $43 area, which could reverse things rather sharply if it holds.  Look out for a strong reversal bounce off that zone or a strong break through.

[donaldprice]

I was going to say Mercury, was slightly worried, when I saw those inventories, I think its best to let the technicals dictate this one, I am currenty waiting for it to reach possibly the 50% level, or a divergence in momentum. Hold fire on longs for now.

[Guest curly747]

I think i would considerably favour the downside when looking at that daily chart. 

[Mercury]

Yeah that is normally when things reverse for me...  Given the strong move down of late a retrace is due, whether it is just a retrace on the way down or something else is too hard to say just now and there is a decent scenario building for another leg up to the $60 area.  This would coincide with another leg up on stocks, which I also anticipate, prior to the beginning of the end of the ludicrous drunken Bull.

 

Check out USDCAD also for clues to Oil, there is an inverse relationship in big picture terms at least (not so much for day trading as USD factors also apply of course.

 

For me I remain of the mindset to seek a rally on Oil, with an inverse bear move on USDCAD (which incidentally is also mirroring USDJPY and in keeping with the USD retrace on DX that I have been waiting for awhile now)

[Guest curly747]

I guess you are right that a retrace is due sooner or later. However i am mildly negative about oil. Seems to be plenty of supply and a few cheaper ways to produce it these days. A move to $60 in the short to medium term looks unlikely to me unless there is some sort of disruption to supply. I am also not hugely bearish because how much lower can it go ? Maybe to $30 ? Can it go further than that ? Production cost could start to provide a floor when it gets to those levels.  

[Mercury]

I understand your logic and would agree if I believed this market was driven by such fundamentals.  The spike up to $150 ish and subsequent collapse was pure speculation in my view albeit behind China demand.  But China demand, and indeed global demand, is waning behind weaker industrial activity in turn driven by lower consumer demand driven by debt fear and poor wage inflation etc etc.

 

Some people believe in a supply glut but then with that plus waning demand a Fundamentals view would call for significant further drops not a range so you should be Bearish right?  Others believe OPEC will manage the price to keep it below $50 (Breakeven for Shale it is believed) and the floor will be the point at which sufficient shale producers have turned off the taps (i.e. a nice trading range but when have we seen that on Oil, I mean ever?).  If this market could be so easily managed by OPEX then why didn't they do so when it boomed before?  Answer, they can't, especially now Iran is back and virtually at war with the Saudis.  All of the producers except the Saudis want the Oil price up but they also need to produce to manage their country economics and all of them except the US have poor economies so they will keep pumping regardless of the price.  No supply restrictions = no bottom on price and coupled with decreasing demand = Bear.  Longer term Oil may have had its day with more and more high tech solutions coming to the fore, some way to go before we are Oil free but maybe sooner that we all might think.

 

So I am long term and medium term Bearish and anticipate a return towards the $28 mark and probably below that.  However before we get there I expect a strong retrace (not sure if this will hit a higher high - e.g. $60ish or be just a retrace on this current move down but one or the other is likely in my view).

 

In the end I find it hard to make any trading decisions off Fundamentals as these seem to only hold for long term trends so I default to technicals (including levels) and this is telling me a retrace is on the cards.  The EIA Crude stocks data release does have some short term volatility impact but never seems to create any dramatic change to the market.  Will be interesting to see if it supports a retrace today...

[Guest curly747]

Hi Mercury,

Well oil did bounce a little today but technically it still looks like a pretty solid downtrend to me in the short and medium term. I would favour selling on any bounce. I have never really followed this market and am interested now thanks to you. I guess we will know in the coming weeks and months. 

[Mercury]

Hi   Oil is a very difficult market to trade.  If you haven't traded it much before I would recommend following it for a good while without trading to get a sense for it.  Because there are just a few massive players you get odd moved that don't seem to obey the "normal rules", whatever that really means...  I look at Oil as much or more even because it is a key measure of industrial activity than to actually trade it so I am interested in what people have to say about things like Oil as a wider macro indicator for other markets.  The most interesting observations on Oil (and High Grade Copper) for me are:

• They reached a massive peak in 2011 off the back of crazy China and emerging market demand but that has been radically reduced now with no return in sight
• They are normally a precursor to stocks moves but stocks didn't follow them down (at least not yet...) why?
• Answer Central banker interference in free market actions - we should have had a similar stocks correction but have not yet

You could argue that Oil and HG Copper have returned to more "normal" levels now.  HG Copper used to trade between 5000 - 15000 before the China craziness so actually could drop a lot further to get back to normal.  Clearly Oil and Copper was in a bubble, which has burst BUT is it over?

 

2 schools of thought:

1. Stocks and Bonds in massive bubble thanks to Central Bank policy which had not produced the intended inflation (except in asset prices) chiefly because energy prices are down.  They will burst on the back of a depression as prices tumble and commodities will lead this down.
2. Stocks and Bonds in massive bubble thanks to Central Bank policy which had not produced the intended inflation (except in asset prices) chiefly because energy prices are down.  They will burst on the back of hyperinflation as the Central Banks instigate a last ditch helicopter money programme and lose control and commodity prices surge along with consumer prices but wages don't keep up.

In no scenario does anyone seem to think that this ends well it is just a matter of when and how (whether we have a period of hyper inflation of depression).  Neither is good but for my money it will be depression as the consumer closes up shop and leaves the corportes high and dry.  At least stuff will be cheaper...

 

Of course I can't be sure, no one can, so I watch the leading commodity markets closely for a sign of either a rampant bull or another bear leg down.

 

Interestingly, if you analyse the Dow you will see that since the May 2015 high and turn, which many thought ought to have produced a correction but was again staved off by the Fed, the sectors driving the new all time highs we are currently seeing are consumer and high tech (plus Pfiizer, which was involved in tax inversion merger attempts).  Those that are still down on May 2015 are industrial and commodity linked (i.e. the engine room of any economy).  Notably in the Bear group you also have IBM, P&G, Nike, Walmart, Disney and Amex.  Not a group I'd like to bet against...

 

So net I am long term Bearish and believe that this rally is running on vapour (the similarity with 2000 and 2007/8 are obvious).  We will find that heavy discounts are keeping the consumers spending but that results in lower top line sales and lower earnings (which is what we have been seeing).  We are seeing higher inventory levels which leads to lower levels of production, which equals lower levels of import/export and lower commodity prices, which is what we are seeing.  Only the Fed are keeping the party going and they are out of ammo.  When it all keels over, as it must do because every Bull is followed by a Bear, then I can't see where the inflation is going to come from (except maybe helicopter money - but if the Central bankers do that then it will end with their heads on a pike and they must know that!  Surely???).  So net, unless the central bankers get the choppers out, we will get a depression and that means Oil and Copper should drop first and lead everything else down.  So I'm looking for signals of another leg down on Oil and Copper and just now it is looking like we have that.  I guess we will only know about helicopter money when the CBs do it...

[Mercury]

Is Oil about to break Long?  If so then this could either be a wave 3-4 (turn back down inside the Daily tramlines if it is) or an A-B-C retrace leading to another strong leg up (possible target in $60 area).