Is It Time to Power Down?

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

We’ve pounded the table on the weakness in energy these past few days, so why stop now? When we find ourselves hammering the same topic time and again, there’s usually a very good reason.

As far as energy goes, there’s been a lot of damage done to the space this week.

Breadth fell off a cliff and was not supporting the new highs for energy stocks.

The relative trends have gotten clobbered, as energy has been among the worst-performing sectors over the near term.

And, just today, we’re seeing failed breakouts in energy sector ETFs across the board.

Since we’ve already written about these themes, let’s dive in and see what energy futures themselves have to say about the situation.

Are futures resilient despite these bearish developments? 

Or are there cautionary signs in the commodities market that are confirming the weakness in the stock market?

Let’s find out.

First up is crude oil:

Based on today’s price action, crude oil futures can be filed under the latter -- cautionary. The intra-day print for the January 2022 contract has slipped back below our line in the sand around 76 and its former 2018 highs. 

Today’s weakness in crude confirms what we’re already seeing from energy stocks and can be added to the list of potential failed breakouts.

But what about crude oil’s derivatives?

To start, here are heating oil futures:

Last month’s breakout in heating oil has already failed. It was one of the weakest contracts on the way up and the last to clear those former 2018 highs. 

Laggards on the way up tend to become leaders on the way down. That’s exactly what we’re seeing with heating oil. 

Since it’s been the weakest link among crude and its derivatives, its ability to dig in and find support will be incredibly important for the entire energy space -- if and when it does.  

Next we have RBOB gasoline futures:

Gasoline is actually the one bright spot among crude and its derivatives. Unlike the rest, gasoline is holding above our risk level around 2.18.

But the bears are definitely trying to knock this one down like the others.

If the failed breakouts stick in the other energy futures, we would imagine that gasoline will soon find its way back into its prior range as well.

Although gasoline futures are hanging tough, today’s weakness is another feather in the cap for energy bears.

The messages from the commodities market support the weakness coming from energy stocks. The breakouts in the three major energy contracts have either failed, are currently failing, or are on the cusp of breaking back into the prior range.

There are plenty of ways to put our money to work. That’s the beauty of trading different asset classes. For now, it’s apparent that energy is off limits regardless of whether we’re trading stocks or commodities.

We’ll continue to update or view as more new data comes in.

See you next week! 

COT Heatmap Highlights

• Minneapolis Wheat: Commercial hedgers have finally lightened up their shorts, but those contracts remain near record levels.
• Cotton: Commercials added almost 3,000 contracts to an already heavy short position this week. 
• US 10-year Treasury Note: Commercial hedgers continue to carry a net long position less than 10% away from its three-year record. 
• Coffee: Commercial short positioning is just 2,000 contracts shy of its three-year extreme.

Thanks for reading!

Let us know what you think. We love hearing from you.

And be sure to download this week’s Commodity Report below!