John Rawlins share some long-term plays in the commodity sector....
Don't Hang Your Hopes on OPEC
11/26/2014 10:30 am EST
Many are wondering whether OPEC can take any action tomorrow to stabilize crude oil prices, so MoneyShow’s Tom Aspray takes a multi-time frame look at crude oil and the energy stocks to determine if his bearish outlook should change.
The upward revision in the GDP caught some by surprise on Tuesday as stocks managed slight gains, even though the report on Consumer Confidence was disappointing. The slightly positive market internals resulted in a mixed close with the Dow Jones Transports and Nasdaq 100 managing slight gains.
The Dow Industrials and S&P 500—along with the Russell 2000—closed slightly lower. There is more data out today on consumer sentiment and the housing market. Given the weather forecast and shortened trading day on Friday, the volume is expected to be light the rest of the week.
As most investors get ready for Thanksgiving, those whose focus is on the energy markets are waiting for Thursday’s OPEC meeting. The most recent rumors ahead of the meeting suggest that production will not be cut despite the plunging crude oil prices.
The technical outlook for crude has been negative for several months as I reviewed again in early October’s How Low Will Oil Stocks and Crude Oil Go? The technical outlook is always more important than crude oil’s seasonal tendency for crude to bottom in the next three months.
The energy stocks have bounced nicely from the October lows and this has encouraged some energy bulls, but is there any technical reason to suggest crude oil or the energy stocks have made their lows?
Chart Analysis: The monthly chart of January crude oil shows that it is ready to close below the monthly starc- band for the second month in a row.
- This is an indication that crude oil is in a high risk selling zone.
- The break of monthly support that goes back to 2010, line a, creates major resistance now in the 83 area.
- The monthly on-balance volume (OBV) failed to make a new highs with prices in June (point 1).
- The negative divergence was followed by a drop below its WMA two months later in August.
- The OBV support at line b, was also violated.
- The OBV is now well below its declining WMA.
- There is first monthly resistance at $80.87, which was the November high.
The weekly chart of January crude oil shows that it tested the weekly starc+ band for three weeks in June (point 2) before prices reversed.
- Crude oil bounced from its monthly projected pivot support in August and September (points 2 and 3).
- Prices have stabilized over the past three weeks but volume has declined.
- The weekly OBV dropped below year long support, line d, in early September, which was a strong warning of lower prices.
- The OBV then rallied back to its declining WMA, generating an AOT sell signal (see circle).
- Since then, the OBV has been leading prices lower and it is well below its WMA.
- Therefore, it would take quite a while before the OBV could move back above its WMA.
- There is initial resistance in the $79-$80 area.
- The declining 20-week EMA is now at $85.23.
NEXT PAGE: Two Energy ETFs to Watch|pagebreak|
The Sector Select SPDR Energy (XLE) is down 0.98% YTD as it has lost 11.28% in the past three months.
- This is despite the fact that XLE has rallied over 12% from the October low of $77.51.
- The rebound is now close to its 20-week EMA at $89.83.
- The quarterly pivot is at $93.71 as XLE dropped below its quarterly pivot on September 12, generating a sell signal that is still in force.
- The relative performance warned of a top in early August when it dropped below its WMA.
- This was the week a LCD sell signal was triggered.
- The RS line continues to make new lows consistent with a sector that is weaker than the overall market.
- The weekly OBV broke its support, line b, at the end of September when January crude closed at $91.98.
- The OBV has rebounded back to its WMA, which is still declining.
- There is initial weekly support at $85 with the monthly projected pivot support at $80.70.
- XOP has been in a trading range, lines c and d, since the middle of October.
- This looks like a continuation pattern, which favors a drop back to or below the October low of $52.15.
- The weekly starc- band is at $50.81.
- XOP is now testing its 20-day EMA with a zone of support in the $55.73-$57.73 area.
- A drop below this support zone is likely to trigger heavier selling.
- The daily RS line has formed lower highs, line e, and has just dropped below its WMA.
- The daily OBV shows a similar trading range as prices closed Tuesday below its WMA.
- There is initial resistance now in the $62.95-$63.89 area with the daily starc+ band at $64.50.
What it Means: The monthly, weekly, and daily analysis of crude oil, as well as the energy sector ETFs, suggest that another decline is likely before a bottom could be completed.
In October’s The Week Ahead: This Market Could Hurt Stocks, I was concerned that the energy sector could drag the entire market lower. This is now a real possibility again as another wave of selling in the energy stocks could help precipitate a deeper market correction.
How to Profit: No new recommendation.
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