Immediate rewards

In last weeks review, I speculated that 1970 (ES futures) / 1980 (SPX) could arrest the decline. As we got closer, I sent out an alert (http://stks.co/c1N54) and a bullish chart on the day before the reversal (http://stks.co/p1A9X).

Despite my bullish message, I was completely surprised to see that we made a new high within only 3 days. Clearly these markets behave abnormal, conditioning investors to expect impossible recoveries. The last two cases clearly exceeded the norm here.

ES future daily chart

ES future daily chart

The bullish message is still intact, and the seasonal tailwinds could keep this rally going a little longer, but we can see that we are now struggling a bit and may thus need to pull back a little bit first.

ES future hourly chart

ES future hourly chart

The hourly chart shows that we peaked the previous high twice and failed twice. Each high exceeding the previous high, possibly running stops of early bears, before reversing. Although expect a pull-back that should exceed 2050 (to set up another bear trap and take out stops?) before advancing further, the markets are seemingly getting less stable. I would still expect the SPX to make a dash for 2100 though.

Crude futures

Crude futures

Crude futures have broken the down trend (http://stks.co/p1BEf), but curiously stopped at what could become a triangle wave 4 consolidation before we get a final leg down.

Bond futures

Bond futures

Bonds also saw a quick reversal, but the lack of volume and the pattern makes me suspicious. I bought some after ES had retraced nearly to the highs and may lock in my profit.

This will be all for today, since I am taking the weekend off to spend with my family.

Oil sentiment

Here is a quick look at Sentiment in the Oil sector.

Oil futures 12/14

Oil futures 12/14

Oil is starting down again, probably based on the remarks out of UAE about $40 oil. I think this is overblown. In fact, sentiment in Oil suggests that we have already seen the washout move and that we may begin stabilizing sooner than I thought, maybe in line with my high target of $55 from this weekend post.

The DTL still hasn’t been broken, so lets look at sentiment.

Brent Oil Overconfidence Index

Brent Oil Overconfidence Index

Here are three charts from Sentix. The overconfidence index suggests that traders are already positioned one-sided and that we could soon see a short squeeze (overconfidence at or below -7 and at or above 7 is extreme territory).

Oil time differential index

Oil time differential index

The time differential index shows that the longer term bias is far more constructive than the short term worries, which is also supportive of a potential reversal.

Oil Strategic Bias

Oil Strategic Bias

The strategic bias in Oil shows a nice positive divergence into the lows, showing that traders are starting to see this decline as an opportunity. Institutional investors are leading private investors in this indicator.

XLE vs SPY

XLE vs SPY

The underperformance of the energy sector is looking exhaustive here too, although there is little in terms of support for the relative chart.

Oil sector vs Oil commodity

Oil sector vs Oil commodity

The Oil sector (XLE) relative chart to the commodity (USO) looks exhaustive as well, suggesting that a reversal in Oil might eventually outperform the reversal in the energy sector. On the other hand, this also shows that the equities have held up well in the face of the oil decline, as this will indeed present a good opportunity for patient investors.

Groundhog Santa

As I have expected since late November, we finally got a minor pullback. The financial media is already going crazy over the contagion from cheap oil price, flashing correlation chart and putting some fear into people. This is also evident from the increase in hedging activity and the outsized move of the VIX last week.

Let’s keep a cool head and look at some things. Earlier this week I mentioned a target for Treasuries (http://stks.co/g1Pnk) and a pullback target for index futures (http://stks.co/j1Po3). Both were slightly exceeded on Friday. The way we closed seems to suggest that we have room to extend further. Here is the evidence:

Sasonal Chart

Sasonal Chart

The seasonal chart does suggest a weakness in the second week of December, just as we have seen last week. In fact, even the peaks and troughs of the seasonal chart lined up with the moves last week by sheer coincidence (these charts are just giving seasonal trends, not daily moves).

ESH5 E-mini chart

ESH5 E-mini chart

Looking at the daily Futures charts, we see that we have punched through and closed below the first support level. Unless we reverse quickly, the 32.8% retracement level is starting to look like a more likely target, since it also lines up with the peak from July. That level comes into play at 1970 for the ESH5 contract (around 1980 for S&P 500).

Indicators chart

Indicators chart

The indicator chart also seems to miss the final washout spike. Its position is comparable with an earlier stage during the October drop. The spike in $trin is  most likely due to the extreme moves in the Energy sector, where we have seen panic selling already, while we saw strength elsewhere. I will analyze this sector in a separate post tomorrow if I find time.

Treasury move

Treasury move

The classic bond contract has already exceeded my upside target for wave B by 10 ticks and if it keeps moving with this strength, we may be on wave 5 already, which would be a bad omen for the stock market (I doubt it). The stong wave volume (bottom) also shows that this up-move in wave B contained more buying than the sharp down move of wave A. However, this does not consider everyone who sold into strength on the bond flash dash (yield flash crash).

Oil weekly

Oil weekly

As I mentioned last week, oil still has a potential $50 target, where the 78.6% retracement of the up move, the January 2007 low and the 61.8% down extension meet. Previously this was also my target for the measured move out of the triangle, but after re-examination, that is now closer to $55 on my chart, where w also have the 50% down extension, making $55 another potential level for reversal, although a weaker one.

Oil short term chart

Oil short term chart

As I mentioned on Stocktwits (http://stks.co/g1PkO) until the steep downtrend line of the current move (see chart above) breaks, it is still too early to think about entering long positions in Oil.

British Patroleum stock analysis

BP technical analysis

BP technical analysis

A user on stocktwits asked me to comment on BP, so I decided to create this simple multiple time-frame analysis.

The conclusion: BP is as cheap as it was 1998 and if it can break its steep short term downtrend, it looks like we may get some positive action soon. However with my recent oil analysis, you should be aware of the risks and the potential for fake-outs and significant price undershoots.

The case for European Big Oil

Wild sentiment swings in broad markets can present fantastic opportunities to patient investors. The reflexive liquidation in the Oil market may present such an opportunity today.

I have just posted an analysis of crude oil and decided to take a quick look at potential long term plays to take advantage of the extremely sharp down move. Please be mindful of the linked analysis, since the move in Oil might not be over yet.

Nonetheless, now is the time to look at potential buying targets in the sentiment washout. I am focusing only on large oil companies that engage in conventional oil production, since they are most likely the long term benefactors of a potential consolidation in the oil market.

The analysis below is extremely simplified. I am not paying any particular attention to any of the underlying fundamentals, the production cost of each company, the debt structure and their investments in unconventional recovery. Do your homework!

However, when I reviewed a few companies and overlayed the oil price one thing struck me as extremely valuable.

Comparing the oil price today to times in the past when the oil price was the same, the American big Oil companies have significantly higher price, whereas the Europeans do not.

One obvious contributor to this huge discrepancy could be share buybacks and the accordingly higher EPS. Again, you should analyze the profit margins for each of the players separately, but even factoring all that in, the Europeans just seem cheaper to me.

The Europeans

BP weekly chart

British Patroleum weekly chart

Price of BP (British) is about the same it was when Oil was this cheap before. The massive overhang from the Gulf disaster isn’t factored in.

Total weekly chart

Total weekly chart

Total (French) looks similar. Also looks fairly priced when only compared to crude oil.

Royal Dutch Shell weekly chart

Royal Dutch Shell weekly chart

Shell also looks ok although not cheap. In fact, none of them look particularly cheap considering where oil stands.

The Americans

Exxon weekly chart

Exxon weekly chart

Exxon looks much different from the Europeans.

Conoco Phillips weekly chart

Conoco Phillips weekly chart

Same for Conoco Phillips

Chevron weekly chart

Chevron weekly chart

Chevron also does not look cheap when compared to Oil.

Make of this what you want. I don’t normally analyze stocks and when I do I look for other things.

Oils slick slide and a possible $50 target

OIl futures, weekly chart with $50 target ?

Oil futures, weekly chart with $50 target ?

Last week I wrote a blog post about the cheap commodity space. Not much has changed in terms of price, which in itself is a strong message. I remarked how Oil was just about to hit its 16 year standing trendline and it did hit that trendline (chart above) and had a one day wonder reversal (chart below). I was very lucky that I was long that day, but I also had the good sense to exit my positions due to an undetermined R2R (see link). It is not that Oil cannot have a huge bounce and shoot right back up above 75, due to any unforeseen event, but after the expected bounce materialized, I had no way to know where oil would go so I chose to exit.

Oil is sitting on a very strong technical support level. Not only did we hit the 16 year trendline, we also hit the 61.8% retracement level of the up move from 2009.

Oil futures daily chart

Oil futures daily chart

Unfortunately the weekly chart wasn’t able to produce much excitement, and even on the daily chart we seem to be determined to test the high volume low.

The problem is most likely the still large number of speculative longs. Although they saw a great reduction, many may have used the bounce to exit positions. In other words there is still plenty of supply left, so we have to see if Oil can build a sustainable base, it won’t be a quick reversal. I would expect at least a final washout of sorts.

The problem with that is that the next lower target level is around the $50 level (78.6% retracement of the bull market, support level from early 2008 and 61.8% the height of the triangle top).

So the question to answer the next couple of weeks is if we will build a base or drop to $50.

Since we still have too many speculators long, and since we haven’t seen a true sentiment washout, I would favor at least one more low to serve as the ultimate washout. A quick reversal from a lower low above this weeks low would be a higher probability entry, as this would set up a classic spring fake-out. I would thus wait for such a signal.

Black Friday deals on Commodities

Oil daily chart

Oil daily chart

The big story today was the massive crash in oil. The supply glut and the reluctance of Saudi Arabia to cut production are blamed on this.

Oil 16 y TrendLIne

Oil 16 y TrendLIne

The fact remains that Oil has suddenly become very cheap and that it is flirting with its 16 year lasting bull market trendline now (actually just below 65), which should at least produce a short term bounce. I wouldn’t expect it to break right away (although pierce it may).

Bond met target

Bond met target

Bonds on the other hand met my target today (see 100% MM on chart above).

Silver down-trend

Silver down-trend

Silver turned back on its Trendline again with volume and price spread, dashing the hopes Silver bulls.

AUD/USD falling wedge

AUD/USD falling wedge

Considering the carnage in the Oil and precious metals markets, the Australian Dollar held up surprisingly well, still within its falling wedge pattern (predicting a fast reversal).

The Ruble and the Russian stock market weren’t quite so lucky.

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