Should You Act on Crude's Seasonal Trend?
05/07/2014 10:30 am EST
Seasonality patterns tend to favor an uptick in crude oil prices from summer to fall, and MoneyShow's Tom Aspray takes to the charts to see if crude is on track to repeat this year.
Stocks took another beating on Tuesday, reversing the positive tone from Monday's close. The small-cap stocks were hit the hardest as the Russell 2000 dropped below its 200-day MA for the first time since November of 2012.
The NYSE Composite is still holding above both its 20-day EMA and the monthly pivot at 10,522. The more important quarterly pivot is at 10,270 and at 1831 for the S&P 500. The McClellan oscillator has fallen to -45 and is now below the late April lows. The sharp 17.8% drop in Twitter, Inc. (TWTR) did not help the market's tone.
It is still an earnings-driven market and quite a few companies are reporting today. The Eurozone markets are mixed while the stock index futures are higher in early trading. The energy and oil service stocks were one of the best performers on Tuesday but what is the technical and seasonal outlook for crude in May?
Chart Analysis: The weekly chart of the continuous crude oil contact shows that the long-term resistance, line a, is in the $111 area.
- The seasonal analysis of crude oil, using data that goes back to 1984, shows that it typically bottoms in February.
- This is indicated by the higher lows and the move above the 21-week WMA (see arrow) as the WMA helps one identify the trend.
- From the middle of April until the middle of June, prices often consolidate (see circle). Prices typically peak in July and August, declining into the end of the year.
- For example, in 2013, crude oil peaked at the end of August as it hit a high of $112.24 and by the end of November was below $92 per barrel.
The weekly chart of the July crude oil contract shows that it peaked three weeks ago at $103.11 and closed last week below $100.
- A flag formation, lines a and b, was completed in the middle of July.
- The 127.2% Fibonacci retracement target at $102 was hit in early March before it corrected.
- The breakout level was tested at the end of March before crude moved to new rally highs.
- The weekly on-balance volume (OBV) moved above its WMA in the middle of November.
- It formed a bullish divergence at the early 2014 lows, line e, which was confirmed by the break through resistance at line d.
- The OBV pulled back to its WMA at the end of January (point 1), which I noted in Volume Always Precedes Price, is a bullish setup.
- The quarterly pivot is at $97.52 with the monthly projected pivot support at $96.57.
- A close back above $101.72 would be a positive sign.
NEXT PAGE: 2 Ways to Play Crude's Potential Breakout|pagebreak|
- The 20-day EMA and monthly pivot are at $75.67.
- The daily starc- band is at $74.27 with the monthly projected pivot support at $72.66.
- The daily uptrend, line a, is a bit higher at $73.50.
- The daily relative performance completed its bottom formation (line c) in March as it overcame the resistance at line b.
- The RS line did confirm the recent highs and is now testing its WMA.
- The weekly RS analysis (not shown) is positive and well below its WMA.
- The daily OBV is now testing its WMA as volume did increase on Tuesday.
- The OBV broke through its resistance on March 27 when XOP closed at $70.51.
- The OBV has longer-term support at line e.
- The quarterly projected pivot resistance at $78.32 is just above the recent highs.
Laredo Petroleum Holdings, Inc. (LPI) reports its earnings on Thursday, and despite the increasingly bullish analyst forecasts for earnings, the stock was off 2.6% on Tuesday.
- The daily chart shows that LPI broke out above the February high, line f, on April 16.
- The weekly starc+ band is at $32.59 with the monthly projected pivot resistance at $33.78.
- The relative performance confirmed the breakout in prices by completing its bottom formation,
lines h and i.
- The daily OBV broke out a week ahead of prices as it moved through its resistance at line j.
- The weekly OBV is positive but does not look as strong as the daily.
- The stock has been trading just above its 20-day EMA at $28.48.
- The monthly pivot is at $28.34 with the quarterly pivot at $25.70.
What It Means: If the overall market sees another wave of selling in the next few days, then the NYSE Composite and S&P 500 may drop to stronger support. The daily NYSE Advance/Decline made a new high last Friday and shows no signs yet of a completed top.
The OBV analysis of crude oil suggests that it will eventually break out to new highs for the year, but it may have to wait until early June.
How to Profit: No new recommendation
Portfolio Update: Should be 50% long SPDR Oil & Gas Exploration (XOP) at $72.91, and I would raise the stop to $75.96. If the stop is hit, I will look to re-buy lower.
Should be 50% long Laredo Petroleum Holdings, Inc. (LPI) at $26.64. Use a stop at $28.18. Sell half at $29.89 or better.