Crude Oil: Close To A Daily Cycle Low

Summary

• The commodity has formed a swing high.
• We are expecting the drop to be short-lived.
• The 50-day moving average looks like a potential target for a low.
• This idea was discussed in more depth with members of my private investing community, Elevation Code. Start your free trial today »

Equities and oil seem to be dropping down into their respective daily cycle lows. Depending on the severity of these declines, we may get long crude oil here to mark up our energy weighting a tad. The reason being that crude oil still has much further to rally (back to its recent 2018 highs) compared to equities in general. The S&P for example is now over 2,700 and a mere 240 points from its recent highs (9%). Crude oil however is still $23 a barrel away from its October highs of last year, which means the commodity is still trading 30% below last year's highs of around $75 a barrel.

Both of these asset classes have been trading in a very tight correlation for a while. With respect to crude oil though, the charts are very much demonstrating that rising prices are ahead of us. As we can see from the chart below, crude is still clearly printing higher lows and higher highs. The price now is clearly embedded in a bullish trending channel. We believe over time the top end of this channel will be hit, which is at around $85 a share. Let's explain why through the daily, weekly and monthly charts.

On the daily chart, we can see that the price has formed a daily swing high. Furthermore, the 10-day moving average has been breached, which is an accurate signal that we are now dropping down into a daily cycle low. The MACD indicators have crossed over and the RSI momentum indicator is dropping down towards oversold levels. The question now is how deep this daily cycle will drop.

Although the moving averages are excellent trend indicators, we prefer to monitor the RSI indicator to spot lows as we see divergences in this tool before bottoms. Possible daily cycle bottoms here would be the 50-day moving average or even just below it at around $50 per barrel as that is where price will encounter strong resistance. Monday the 11th of February will be day 31 in this present daily cycle. Price topped on the 1st of this month, which ensured a right translated cycle (higher highs). This means those highs should be taken out easily in the next pending daily cycle.

The weekly chart supports our bullish thesis. We are only starting week 7 on this intermediate trend this coming week with the previous week being the highest week of the cycle. The 10-week moving average has started to move up, which is a strong signal that a brand new intermediate cycle started in December. This really is what the bears will not accept. They still believe that there is a strong possibility that the December 24th lows will get breached in this cycle. However, based off the ferocity of the up-move and where we are from a cycle standpoint, we simply cannot envisage that playing out at this moment in time.

The monthly chart gives us a clear indication of how crude oil cycles over the long term. As we can see from the chart below, the sharp drop into the recent December low resulted in heavy oversold conditions on the monthly chart. In fact, the magnitude of the oversold levels was on par with the bear market bottom in 2016. Furthermore, the December low took place 18 months after the 2017 yearly cycle low. This means it was well beyond its timing band for a yearly cycle low. Finally, the recent price action has resulted in a monthly swing low. The odds now look heavily in favor of the December low also ending up being a yearly cycle low.

Therefore, to sum up, our strategy will be to get some long deltas in crude oil once it forms a swing low. As mentioned, the upside potential from here is probably greater than equities. On any potential swing play, we will put a stop just underneath the low point of the swing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in USO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[ninjatraderkills]

How about Oil going to 122 bucks per barrel in April ? We never touched that pivotal level, why not test it in 2019?

[Calculus]

I don't understand how the rest of the World can afford so much as a barrel at the moment...let alone a lump on coal.

[Contango82]

It was way above 100 barrel for 3 years and Asia was booming. 50 is cheap, will not stay here for long.