Sunday, February 14, 2016

OVX Oil Volatility and WTIC West Texas Crude Oil Daily Charts

Oil volatility is off the charts negative; you can smell the fear. Several oil traders jumped off the ledge last week; fortunately the ledge was the kitchen counter in the breakroom where the microwave oven is located. Even though oil prices remain soft, long traders have not yet stuck their head in the oven. Traders are wringing their hands professing doom and gloom, throwing their arms in the air calling for sub 20-dollar oil. Each day becomes more negative against oil prices; the boat is fully loaded to the short side. No one is long oil; everyone is convinced that oil will crash any day. Can it? Sure it can but typically when the sentiment is off the charts to the negative side and there are newspaper and web site headlines predicting the demise of oil that is when it will recover.

Keystone pointed out the uber negative sentiment about 3 weeks or month ago which created the mid-January bottom in oil. Prices ran higher and it looked like the worst may be over but the daily news headlines with OPEC, non-OPEC nations and Russia unwilling to cooperate with a production freeze or cut back, oil prices reverse and begin collapsing again.

The question is always if the negative news is priced in already, or are continued moves lower in oil justified on the negative news bites. Much of the negativity is likely priced in. The oil volatility chart, OVX, verifies the panic and fear rampant in the oil market. Everyone is walking on egg shells. The cab driver said he took his entire life savings and went short oil because the guy on television said it was a sure bet and oil is guaranteed to move lower.

Volatility shoots above the prior two highs and violates the upper standard deviation bands identifying where a bottom in oil price is likely. The pink dots show how volatility is extended way high above the moving averages so a mean reversion lower is needed; conversely WTIC is extended below its moving averages requiring a mean reversion higher.

Note how WTIC price has not touched the upper standard deviation band since September-October; price will need to move up to there at some point. A move back to the middle band, at 30.45, is in play, at a minimum, if price recovers as expected. Friday took a big move towards this target with current price at 29.02. The upper band is at 34.16 and the 50-day MA resistance is in that neighborhood at 33.78, so the 34-ish level is an upside target.

Keystone continues to like oil on the long side; currently in USO and UCO on the long side. Oil prices are very news dependent but if the news remains status quo, then oil should recover in price due to the excessive fear, panic and worry. If oil prices recover, stocks will recover. 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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