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Next Move In Oil Price: Another $5-10 Lower

Oct. 09, 2019 9:54 AM ETAPA Corporation (APA), APC, BP, XOMSHEL2 Comments
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  • Crude oil price in a tepid down-trend, but the technical picture not obvious.
  • USDollar index however is looking VERY bullish.
  • Given -80% correlation between oil price and USD, a sharp USD rally is likely to trigger another leg down for the oil barrel, likely another $5 to $10/bbl lower.

Oil price chart is difficult to read at present. With solid support in mid-$50s (Brent), one might even venture to bet on the long side. However, since last October, the picture has been mostly bearish over the last 12 months.

But there's an important element suggesting that the present consolidation pattern could resolve on the down-side. Namely, oil price has a fairly robust, 80% inverse correlation with the US Dollar index. More about that at this link.

At the moment, the US Dollar looks positively bullish:

Over the past 20 years as chart analyst, I've observed the above pattern outlined in blue arcs countless times: a strong price move is followed by a broadening, then narrowing consolidation in the same direction as the initial move. The consolidation phase almost always resolves itself with another strong move in the same direction as the initial one. I call this the "musical note" pattern but if someone can suggest a better name, I'd love to hear it. In the above case, we might see the USD break new highs toward 104 levels. If the rally closes above the 2016 peaks, it might extend even higher, toward 106 or above.

Given the inverse correlation between the USD and the oil price (USD strength correlates with oil price weakness), dollar bullishness suggest that oil price will likely see another leg down, in a move that might mirror the USD in intensity (i.e. as much as $5-10/bbl) with Brent falling toward high $40s and WTI toward low $40s.

Decisions, decisions...

And as much as I enjoy chart analysis, all that thinking and analyzing is for naught unless you take and execute actual trading decisions. For this reason I built the I-System which does technical analysis "under the hood" and spits out done decisions, with one great advantage over my human fallbility: the decisions are based on numerically exact analysis and they're unwaveringly consistent over time (and can thus be back-tested for effectiveness).

As it happens, I-System strategies, for the most part are entirely in accord with my analysis above. Below is the summary page of our Energy report:

Each line in the above report summarizes a set of 20 individual I-System trading strategiesDetailed page shows the positioning of each of the 20 strategies trading Brent crude oil. Notations L, M, S in "Strategies" column denote the length of the trend cycle (Long, Medium, or Short-cycle trend).

The positioning is broadly appropriate to the current picture in the market. While most long and medium-trend strategies remain positioned on the short side, three medium and short/medium trend strategies have reversed to the long side resulting wiht an overall 70% short exposure.

I expect that the  resolution of the current USD and oil price consolidation will unfold over the following three months. Watch the oil price - but also watch the USD index.

My TrendCompass reports are avaialble for subscription covering energy, metals, agricultural commodities, FX, equity indices and treasuries. Here's an 8-min. presentation:

Alex Krainer [alex.krainer@altanawealth.com] is a hedge fund manager and commodities trader based in Monaco. He wrote the book “Mastering Uncertainty in Commodities Trading

Description: Trading and hedging commodity price risk

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

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