Energies are getting too frothy
from ChartWorks:: published by Institutional Advisors
The oil price is just exiting the sweet spot of the normal seasonal rally. Historically, oil prices bottom in December-early January and rally into April-May. However, in the past twenty years there has been a tendency for prices to accelerate on the upside from mid February and peak early in March before settling back and then making a secondary high in May. The excess readings in the market suggest that the initial high is now in place.
The action of the oils in the past month exhibits all the characteristics seen in a bubble. Not only are the investment grade issues rallying to the point of generating upside exhaustion readings, but the juniors have also joined the parade. Almost everyone seems to have an energy story; whether it is oil, gas, coal or uranium. While not necessarily the end of the bull market, the sector is clearly into a euphoric state and in need of a very significant correction. The 20-week exponential moving average is the mostly likely initial target for equities in the oil patch.
The following page compares the weekly charts of Imperial Oil with both the end of the tech mania of 2000 (as represented by Cisco) and the final days of the oil boom in the late 1970’s (represented by Dome Petroleum).
Under this scenario, the oils will give up 10% to 20%, find support at the 20-week moving average (IMO: $77) and then stage a further rally to new highs. This would allow for a “tested high” in crude oil into the seasonal high in May. However, the May high would likely be full of negative divergences. As such, we would have the makings of a rolling distribution style of top. The subsequent hard break into the seasonal low of July would coincide with a test of the 50-week moving average.
Long-term Bullish Scenario
The bullish scenario would suggest that the current rally is merely one step along the way in a longer term move. This would be similar to the highs preceding the 30% to 37% corrections seen in techs into 1994, April 1997 and October 1998. It would also be similar to the 35% correction that was seen in Dome Pete into October 1978. Under this analysis we can look for IMO to drop by 30% to 37% in value (targeted range $59-$65) before staging its next major advance. This would become a good test of the rising 377 day moving average and the internal support line dating back to 1997.
Here are some other examples of oils compared to bubbles
Last summer we presented the following analysis showing the similarities in the twenty-three year bull market in bonds with that of crude oil. Once prices reach the top of the percentage band (currently $57) they are vulnerable to a decline. We are also testing the internal resistance line (red) drawn from the 1986 bottom. Initial support should be evident around $42.
Of course, the Treasury chart is the model and, on the longer term, it provides an intriguing comparison.
In the meantime, an intermediate break is at hand. Both investors and traders should take some money off the table.
Some may be concerned about what a decline in crude could do to gold. The following page from last week's Pivotal Events points out that the ratio (gold/crude) could be the main thing to watch on the long term. The paramount conclusion from this edition of ChartWorks provides some guidance on the "more precise decision".
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January 26th, 2020
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