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  • Long-Term Equilibrium In Crude Oil Starts To Give Way. 0 comments
    Jun 17, 2013 1:50 PM | about stocks: USO, UCO, OIL, DBO, SCO, GSG, JJG, GSC, JJA, BAL, FUE

    A Macro Technical View of Crude Oil futures:

    The two charts below are of crude oil futures from a weekly perspective. (Note the chart construction used is of continuous contracts that are of the most liquid months).

    The first (Weekly Crude Oil since 2006) shows how crude oil has seen extensive consolidation. So extensive in fact, that a smaller symmetrical triangle has developed within a larger one. This is exceptionally rare.

    But on Friday, trendline resistance (97.09) of the smaller triangle was broken by way of the end of week close above it (97.85 in the July contract).

    (click to enlarge)Crude Oil futures since 2006

    (All charts were drawn using CQG)

    Bullish technical scenario:

    The smaller, more recent triangle has a pattern magnitude of 1565 ticks (or $15.65). So theoretically, last week's close above trendline resistance would have a minimum measuring objective of 112.74 (97.09 + 15.65).

    The larger triangle has a pattern magnitude of 3769 ticks (or $37.69). A weekly close above 103.78 (trendline resistance) would have a minimum measuring objective of 141.47 (103.78 + 37.69). This weekly trendline has a negative slope of 10 ticks and will arrive at 103.68 next week.

    Bearish technical scenario:

    Given the upside breakout, the downside objective to the smaller triangle has been nullified (it's still labeled but in grey).

    However the larger symmetrical triangle is still forming. Therefore if a bullish failure were to occur and crude futures turned lower, a weekly close below trendline support at 80.41 (positive slope 6 ticks/week) would have a downside objective at 42.72 (80.41 - 37.69).

    Perfect Equilibrium:

    Now what could make this inevitable breakout so volatile is that not only has crude oil seen a great deal of range compression, but look at where this compression is taking place.

    (click to enlarge)Crude Oil futures since 2011

    The first chart shows the 2008-09 range being a high of 147.27 down to a 33.20 low - with the 50% retracement being 90.23.

    The second chart (Weekly Crude Oil since 2011) extends the trendlines of both triangles to show their respective apexes.

    Both sets of weekly trendlines arrive to form an apex that comes only about 1% (+/-) away from 90.23 - the 50% retracement.

    The more recent triangle's apex is at roughly 91.00, and the apex of the larger triangle arrives at 89.35 or so. One apex slightly above 90.23, and one slightly below ("slightly" is used relative to the weekly magnitude).

    Coincidence perhaps, but still what are the chances?

    We're seeing long and intermediate-term consolidation 'doubled' (with the nested triangles), and then transposed over a level that's a natural area of long-term equilibrium (the 50% retracement).

    What this suggests to me is that crude oil has formed as much consolidation as it can stand.

    My technical bias is bullish (65/35), but I would recommend buying longer-term volatility in either direction.

    Additionally what this infers is that extended momentum trading and/or trend following in crude oil could be just around the corner.

    Goldman Sachs Commodity Index Coiling As Well:

    Considering the high weighting of energies in the GSCI, an upward trend in Crude Oil can push the index above near-term resistance at 636.32 - 637.89 (the May high and March low respectively).

    But in the weekly cash GSCI chart below, extremely well-tested trendline resistance at 665.834 (which has a negatively weekly slope of 0.88) would await it.

    (click to enlarge)Weekly cash Goldman Sachs Commodity Index

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: Macro, Commodities, Energies, Crude Oil Stocks: USO, UCO, OIL, DBO, SCO, GSG, JJG, GSC, JJA, BAL, FUE
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