Saturday, February 7, 2015

WTIC Crude Oil Monthly Chart Lower Band Violation

The big question last week is whether oil has bottomed, or not. Traders are tripping over each other buying the long side proclaiming the bottom in oil but these were the same folks that said prices will continue collapsing two weeks ago. So the crowd rushes into oil and energy stocks last week creating a robust two-week rally in oil stocks and a big +9.4% rally in West Texas Crude as shown above.

The rig count keeps dropping so the perceived lower oil supply helps to support higher prices. Perceived is the word since global oil producers are busy stabbing each other in the backs. No one wants to scale back on production since someone else will simply steal that market share so prices may remain subdued through the year. The positive divergence on the daily and weekly charts create the launch in oil price this week and further higher highs are expected in the daily and weekly time frames, therefore, the oil bulls proclaim victory and everyone brags that they accurately called the bottom in oil. But before the chests are puffed out too far, the monthly chart says there remains some unfinished business.

Oil collapses dramatically and remarkably remains under the lower standard deviation band at 52.65. Price is way out of whack to the downside and needs to recover. The middle band which is also the 20-month MA at 89.92 and dropping is in play. Note the collapse in oil in 2008 (small circles) that shows price violating the lower band and then recovering to the middle band in about one-year's time. Thus, price may take many months to rejoin the 20 MA middle band and by then that will perhaps drop into the 70-75 range shown at the right margin. This serves as an upside target say from summer into year end.

The yellow lines show important price S/R levels that can serve as sideways channel lines if price establishes a sideways bias ahead. As mentioned, daily and weekly charts want to see higher prices so that may keep oil buoyant in February and part of March. The MACD and histogram on the monthly chart, however, remains weak and bleak and prefer to see lower lows in price again. This was the case in 2009 but the Federal Reserve overrode the technicals by goosing the stock market with quantitative easing. The RSI and stochastics are oversold and positively diverged creating the bounce so far this month. The money flow is not enthusiastic about the recovery. The RSI and MACD are trailing lower over the last few years (long thin red lines) but price remains elevated above the 2009 lows; this may act as a weight on price.

The 200-month MA may be flattening which would be a dire signal. Again, look at how the Fed manipulated markets and saved the day in early 2009 to send the 200-month MA ever higher to current levels. The yellow lines show 75, 66, 54-56 and 42 as key support/resistance levels. As price moves higher, now at 52.34, the 54-56 resistance is key, then the 60-61 resistance (200 MA), then 66 then 75.

Look at how oil peaked in spring/summer 2008. That was the commodity bubble back then that popped. The oil price collapsed into early 2009 when the Fed goosed the stock market with QE 1 (blue box) and prevented capitalism from occurring which would have cleared the markets. Then the Fed goosed oil and commodities further in 2010 with QE 2 (blue box) money printing. It is shameful; even Keynes himself would blush if he were alive. To answer the ongoing question about whether lower oil prices are good or bad for the economy, open your eyes and look at the chart. Oil price peaked and collapsed from May-July 2008 forward. Oil prices fell and gasoline at the pump dropped which was a happy sight. Folks cheered the relief at the pump all the way until the stock market crashed 4-6 months later. Does that answer your question? Coming back to present day, oil started collapsing about six months ago in the same timing window as the 2008 scenario.

Mixing together all of the above mumbo-jumbo and sprinkling some magic dust on it, the projection is for price to move sideways with an upward bias for a month or few, but weakness should reenter the picture. Those buying energy stocks will likely be disappointed since a big pop has already occurred and much of the action may be more sideways in nature going forward rather than a robust move higher. At the same time, shorts in the oil patch will be frustrated at sideways moving prices. Considering that the weekly chart wants to see some higher highs in price in February and perhaps March, the 54-56 resistance will likely give way so a potential top channel line for oil in 2015 would either be the 61-ish or 66-ish levels. Projection is for price to move sideways through 42-66 for the remainder of the year with perhaps choppy erratic trading continuing as shown by last week one day up +10% and the next day down +10%, then up again.

A tighter projection would be through 48-62 for this year with 55 representing a mid-point. It will be interesting to see if the oil recovery move for a few weeks forward is a vertical spike or a more subdued path higher. The thought is that it will become more subdued as February plays out. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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