From the desk of Tom Bruni @BruniCharting
Crude Oil is down roughly 35% over the last two months as record bullish sentiment unwound and prices fell in what was essentially a straight line. There hasn’t been any reason to bottom-fish this market, but today we received our first indication that a short-term bottom may be in.
The thesis is pretty simple. Optimism was at record highs in October, but this price decline has reset that sentiment and created an environment where prices can start to find their footing. In addition to improvements in sentiment, we’re seeing bullish momentum divergences being formed and/or confirmed across the board in the Energy Commodities themselves, as well as their corresponding US Equity Sectors.
This not only signals some potential exhaustion on the side of sellers, but more importantly, it allows us to define our risk on the long side which we haven’t been able to do since prices broke back below their July highs.
To illustrate this, let’s take a look at some daily charts.
Crude Oil made a new marginal low last week and gapped higher today, confirming the bullish momentum divergence that’s been forming. As long as prices are above last week’s low, then this divergence and failed breakdown remains intact, with a move above 55.25 signaling significant improvement and further upside potential. With that said, mean reversion toward 62.50-63.50 wouldn’t unreasonable if the recent lows hold.
Click on chart to enlarge view.
The level in Gasoline is a lot more clear because prices are finding support at their 2017 lows. If prices are above 1.38, we could see some mean reversion toward 1.75. On the way down it had been the weakest, not making a new high in October and leading us lower since.
Heating Oil, which led us higher, is also back at a clear support level near 1.816. If prices are above that level, they could see a bounce toward 2.04.
In addition to these commodities on an absolute basis, we’re also seeing a bullish momentum divergence in the energy-heavy CRB Index relative to the equally-weighted CCI Index. Again, not the sign of a major bottom, but an indication that some short-term relief may be ahead for Energy.
Then looking at the US Equity market, we’re seeing bullish momentum divergences being formed and/or confirmed in the broad-based Energy ETF $XLE, the Exploration and Production ETF $XOP, the MLP ETF $AMLP, the Refiners ETF $CRAK, and the Oil Services ETF $OIH, which is pictured below.
These Energy ETFs are all still hot messes and aren’t presenting clear trading opportunities, but from an informational perspective it’s certainly encouraging to see that the Equity market is suggesting the same thing that we’re now seeing in the commodities themselves.
Due to the nature of this counter-trend trade, the outcome will likely be a binary one. Either all of these divergences see upside follow-through in the next few days and Energy Commodities experience some mean reversion, or they quickly fail and we need to get the hell out of their way again.
But if you’ve been itching for an opportunity to bottom-fish these three commodities, then the inter-market developments discussed have not only increased your probability of success, but they’ve also allowed you to take a position in a responsible manner.
Thanks for reading and let us know your thoughts!