Before we dive into the cheesecake, a quick word on oil.
We’re of the opinion that this week will tell the tale for oil for the next four to six months, at least. The charts show that both the United States Oil Fund (NYSE:USO) and the Select Sector SPDR Energy ETF (NYSE:XLE), the first a proxy for crude, the second a measure of big cap oil producers and marketers, are presently at tipping points, moments in their investment trajectories that could just as easily bring them into a deep swan dives – bear markets the likes of which we haven’t seen in the oil patch for seven years – or pull them higher into rallies that jolt the oil bears out of their languor like a metal spike in the shin.
What’s most interesting about these two wildly divergent possibilities, is that the technicals are pointing toward lower prices for oil and the oil producers, while fundamental considerations – including the possibility of a widespread war that engulfs the entire Arabian peninsula – are militating toward much higher prices.
Let’s begin our analysis with a gander at the technical picture –
This is the Select Sector SPDR Energy ETF (NYSE:XLE) for the last year. The chart neatly encapsulates the entire decline of the major oil producers since their top last June.
As you can see from the red circled area, the last month’s trade has been driven into a confined range between the short term moving average and the all important 137 day moving average. As we noted above, which way she heads now will prove fateful for the next half year, at least.
And which way is she, in fact, headed?
The technical read is very negative. Outside of the fact that the 137 DMA has provided strong support for the last three weeks, all of the moving averages are themselves declining and with the 274 DMA (orange) set to cross below the long term (411 day) yellow moving average, we could have a situation within a week of a fully unfurled and declining quartet of moving averages, an all-out bearish development, and a no holds barred ‘sell’ signal for anyone engaged in technical analysis.
Add to that a sub-waterline RSI read and a MACD indicator that’s poised to confirm with its own dive below the waterline, and you have the makings of a selling spasm that could commence anywhere from three days to two weeks from today.
The chart for USO is really no different from the above, save for the fact that the 137 day moving average is no acting as resistance to a continued rise in the price of oil (deep red line), and all four moving averages are already unfurled and trending lower.
Have a look here –
RSI and MACD reads are less gloomy than their XLE counterparts, trending as they are above their respective waterlines (n blue). How long they stay afloat is an open question.
That said, the narrowing action of the last month will have to be resolved in the next day or two. We’ll either pop safely above the 137 DMA or we’ll succumb to the sellers and head back toward prior lows at $15.61.
Turning Back From the Brink
The longer term chart for oil (not shown here) does show a few signs of hope, but on the whole they’re not convincing. If there’s going to be a turn away from the precipice it will have to come from the fundamental side – specifically, from a supply disruption, most likely to come either from war damages or a policy reversal from Saudi Arabia (and others) now selling their crude at bargain basement prices.
The latter, policy shift, is not so probable, given the geopolitical situation in the Middle East and the desire of the Saudis to starve their neighbors – and adversaries – in Iran and Russia of cash.
That leaves war.
And what’s the likelihood of a broader, regional conflict occurring in the next week or two?
We have no idea. But they’re certainly just as likely, if not more, than they have been for the last few months.
The immediate triggers we’re monitoring include:
An ISIS breakthrough into either Jordan or Lebanon, where the competence of the forces of the Hashemite Kingdom and Hizballah (in Lebanon) are increasingly questionable in the face of a well-motivated and well-equipped ISIS combat force.
A hot confrontation between Iran and either Saudi Arabia or the U.S. over the ongoing civil conflict in Yemen.
The fall of the Assad regime in Damascus or the U.S. backed regime in Baghdad.
Any of these developments has the potential to ignite the conflict into an all-out regional conflagration, and would undoubtedly push the price of oil higher simply over concerns of supply disruptions. Real disruptions – particularly of Saudi resources – would become an immediate and prominent goal of all parties, save, of course, the Saudis themselves.
We’ll be keeping an eye on developments, and of course, you’ll be informed of any action that needs to be taken if and when the break in oil occurs.
Trading out of a Winning Position
Until that time, we’ve got profits. And we think it’s a good time to take them.
The trade we’re closing was initiated three weeks ago in a letter called The Dam Begins to Crack. There we urged you to consider a speculative PUT purchase on base and precious metal mining powerhouse Freeport MacMoRan (NYSE:FCX), whose stock we felt had gotten a little too frothy.
Specifically, we wrote –
…[F]rom her mid-March bottom at $17, FCX has risen 41% on the coattails of gains in copper. But we’re nearly overbought, and a bearish engulfing pattern formed yesterday indicates the top is in.
Have a look at the chart –
We bought the August 20 PUT for $0.79, and today it trades for $1.07.
That’s a gain of 35% in three weeks. Or 606% annualized!
Options Trader Elite recommends you sell your FCX PUTs for a hefty gain.
And keep your eyes peeled for oil’s next move.
With love of the hunt,
Hugh L. O’Haynew