The sharp decline in oil prices and related equities could be coming to an end, giving rise to a strong period of outperformance once more decisive signs of a bottom are evident.
The slide in crude oil prices and the sharp resulting decline in gasoline prices have not yet caused a significant turnaround in consumer sentiment. This is due in part to the fact that gas prices drop much more slowly than they rise, and based on the current futures prices, we should be paying considerably less at the pump that we are.
Those who have followed and traded the crude oil market over the years know that it is always dangerous to either get complacent about crude oil's trends, or to try to pick tops and bottoms.
At last Friday's lows, crude oil, basis the August contract, was down $33.82 from the March 1 high. Energy stocks are now close to three-year lows, and despite the rebound last Friday, crude oil is again lower in early-Monday trading. As a result, many investors are wondering if now is the time to buy oil and energy stocks?
Chart Analysis: The weekly chart of the continuous crude oil futures contract shows that it has been bumping into the weekly Starc-band over the past month.
- On the weekly chart, there is next support in the $75 area, line a, which corresponds to the October 2011 lows
- The weekly Starc- band is now at $74.50 with longer-term chart support from August 2010 in the $70.80 area
- Weekly on-balance-volume (OBV) closed below long-term support last week, line d, and shows no signs yet of bottoming
- OBV has resistance at its sharply declining downtrend, line c. It is quite oversold and well below its declining weighted moving average (WMA)
- Initial resistance is at $81.50 with more important resistance near $84
The United States Oil Fund LP (USO) is a very liquid ETF that tracks the spot price of West Texas crude oil minus expenses.
- USO peaked on March 1 at $42.30, and as of last Friday's close, it is down 28.8% from its highs
- In October 2010, USO made a low of $29.10. In April 2009, it traded as low as $28.56
- Daily OBV is still in a solid downtrend and has formed lower highs, line e, and lower lows, line f
- Volume was quite heavy last week and could indicate panic selling
- First resistance is at $31-$31.60 and the declining 20-day exponential moving average (NYSEMKT:EMA)
The SPDR S&P Oil & Gas Exploration ETF (XOP) has had a rough year and is down 28.9% from the early-year high at $65.81.
- The major 61.8% Fibonacci retracement support at $46.85 was broken when XOP made a low in late May of $44.23
- Relative performance, or RS analysis, violated important support in late March, signaling that XOP had started to underperform the S&P 500
- Relative performance is still in a well-established downtrend, line c, and has stayed below its weighted moving average for most of the past few months
- OBV dropped below major support, line d, in early April. This breakdown level was tested in early May before the OBV dropped further
- Volume was heavier at the late-May lows than it was last week, so a short-term bottom could be forming, although the OBV still looks weak
- There is a band of resistance on the daily chart at $48.67-$49.46
ConocoPhillips (COP) is a $66.5 billion integrated oil company whose stock currently yields 4.9%. After making a low of $50.62 in early June, COP reached a high of $56 last week. Next major resistance is in the $58-$60 area.
- COP is already down sharply from the highs and looks ready to test the gap support from $52-$52.40
- This oil stock has one of the most constructive relative performance patterns, as it has formed higher lows, line i
- A move in the RS line above resistance at line h will suggest it is leading the S&P higher
- Daily OBV formed a slight positive divergence at the lows and has pulled back to its weighted moving average
- A move in the OBV above the resistance at line j would suggest a bottom is in place
What It Means: At the end of April, the technical studies pointed to lower oil prices. It was also evident that crude oil was not following its typical seasonal trend.
If the market is in the process of starting a significant new uptrend, then this is one sector that could be a star performer. The technical evidence suggests that it is still too early to buy crude oil or the United States Oil Fund (USO), but this could easily change in the next few weeks.
Though XOP may be forming a bottoming, the weak RS analysis suggests we should wait for stronger evidence that a low in place.
How to Profit: Last month, I recommended buying ConocoPhillips (COP) at $50.32, a buy level which was just missed. That initial order should now be cancelled and a new order to go 50% long COP at $50.72 and 50% long at $49.28 with a stop at $46.88 (risk of approx. 6.3%) should be initiated.