Crude Oil, Oil Stocks and the Gold LinkCommodities / Oil Companies Aug 27, 2013 - 06:19 PM GMT
The second half of the previous week brought interesting pieces of economic data and disturbing geopolitical news.
On Wednesday, weekly inventory data from the U.S. Energy Information Administration (EIA) showed that crude oil inventories declined in line with forecasts. Traders had expected inventories to decline by 1.5 million barrels, while the actual decline came in slightly lower - at 1.428 million barrels. Taking into account another weekly inventory decline, current crude supplies are at their lowest level since Aug. 31 last year.
At the end of the previous week, the combination of positive global economic data, which improved the outlook for oil consumption, and geopolitical tensions in the Middle East fueled oil prices. Light crude extended Thursday's gains and climbed above $106 per barrel on an intraday basis.
According to Reuters, manufacturing data for the two largest oil consumers, the U.S. and China, showed that both nations were regaining momentum. U.S. PMI data showed that the nation's manufacturing activity rose at its fastest pace in five months. In China, a PMI reading of 50.1 for August was a four month high and a huge jump from last month's disappointing 47.7.
As we all know, the markets have been speculating for months now that the Fed might trim its stimulus by September and it seems that recent positive economic data have raised such fears. Keep in mind that any reduction in quantitative easing will cut the flow of cheap central bank money that has boosted market liquidity and bolstered riskier markets like commodities.
Taking this into account, investors are probably asking the same questions: what impact have these circumstances had on the light crude's chart? Have they changed the outlook for oil? Where are the nearest support zones and resistance levels? Can oil climb above $110 in the near term? Or maybe the oil bears will return and trigger a deeper correction?
To have a more complete picture of the current situation in the oil market, we take a look at the charts from different time perspectives. Let's start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).
On the above chart, we see that in June the price of light crude increased above the long-term declining resistance line based on the July 2008 and the May 2011 highs (bold red line). In the following month light crude continued its rally and climbed above the next resistance line based on the September 2012 and March 2013 highs (the upper black line). Since then, light crude remains above both previously-broken resistance lines and the breakout hasn't been invalidated.
When we take a closer look at this chart, we see that the black declining resistance line is also the upper line of a large triangle. If the oil bulls do not fail, the rally will likely be continued.
From this perspective the picture is bullish.
Now, let's zoom in on our picture of the oil market and see the weekly chart.
On the above chart we see that last month's increases led light crude's price to over $108 per barrel and the price target for the inverse head and shoulders pattern was reached. This positive event encouraged investors to take profits after three weeks of growth, and the price dropped slightly to above $102 per barrel. Despite this decline, oil bulls didn't give up and WTI climbed above $108 once again.
As you see on the weekly chart, the recent weeks have formed a consolidation. The inside bar candlestick pattern is worth mentioning at this point. It is characterized by the inside candle's price action being completely covered by the price action the week before. According to theory, if the buyers manage to break above the resistance level (the July top), the price target for the pattern will be around the May 2011 top. However, we might also see a bearish scenario: if the price drops below the support level (the August bottom), the price target for the pattern will be around the previously-broken neck level of the bullish inverse head-and-shoulders pattern (currently slightly below $97).
Please keep in mind that there is a strong resistance zone based on the March 2012 top and the upper border of the rising trend channel which may encourage oil bears to go short and trigger another corrective move. However, the outlook is more bullish than not at this time.
Now, let's check the short-term outlook.
In this daily chart, we see that the situation hasn't changed much in the recent days.
In the days following the invalidation of the breakdown below the July 30 low, the price of light crude rebounded. That increase led light crude's price to over $108 per barrel once again. In this way, the oil bulls almost touched the August high. However, closeness to this resistance level encouraged investors to take profits one more time.
Although light crude declined in the first half of last week, the proximity to the bottom of the previous corrective move (the August 8 low) encouraged buyers to act and light crude climbed to over $106 per barrel on Friday.
Please note that the recent correction is very similar to the corrective move from the June 19 top to the June 24 bottom. From this point of view the short-term situation is bullish.
Additionally, when we factor in the Fibonacci price retracements, we clearly see that the correction is quite small because it hasn't even reached the 38.2% level. In my opinion, this is definitely a bullish factor.
On the one hand, if the buyers manage to push the price higher, the first price target will be the July top. The second one will be the March 2012 high and the next one - the May 2011 top.
On the other hand, it's worth mentioning that if the oil bears show their claws once again and successfully push the oil price below the August low, we may see a bearish double (or even triple) top pattern. According to theory, the price target for the pattern is around $96.50 per barrel.
However, before the sellers will be able to realize their scenario, they will have to break below several support levels. The first one is the upper line of the rising wedge (currently close to $102). The second strong support zone is based on the June top and the April high (slightly below $100). This area is also supported by the bottom line of the rising wedge and the 38.2% Fibonacci retracement level. There is also more support based on the 50% Fibonacci retracement level around $97.50.
Summing up, technically, the short-term outlook for light crude is bullish and the uptrend is not threatened yet. The recent decline is still shallow and very similar to the corrective move from the June 19 top to the June 24 bottom which is a bullish sign. However, taking into account the strong resistance zone on the weekly chart and the potential double top pattern, a confirmation of a breakout above the July top or a breakdown below the August bottom might be worth the wait.
As is well known, price moves on individual charts should confirm a major trend. Even if crude oil prices and oil stocks don't go hand in hand all time and there are divergences between them, it's worth noting that they usually give us some clues. Thus, you should pay attention to the oil stocks index even if you only trade crude oil.
With that in mind, we use the NYSE Arca Oil Index to represent the oil sector and now examine it from different time perspectives.
According to NYSE Euronext, the NYSE Arca Oil Index (XOI) is a price-weighted index designed to measure the performance of the oil industry through changes in the prices of a cross section of widely-held corporations involved in the exploration, production, and development of petroleum. The XOI Index was established with a benchmark value of 125.00 on August 27, 1984.
Let's start with the long-term chart.
Looking at the above long-term chart, we see that the oil index moved lower after trying to break out above the 2011 top. Although there was a small breakout in May, it was invalidated in the following month and the XOI declined below the 1,300 level. Despite this downward movement, buyers managed to push the oil index higher and now it's quite close to the May 2011 top once again.
Please note that the NYSE Arca Oil Index still remains above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn't been invalidated. Additionally, the oil index is still in the rising trend channel and, from this perspective, the situation is bullish.
When we take a look at the above chart and compare the price action in the NYSE Arca Oil Index to the action in light crude, we see that oil stocks were stronger in the first five months of the year. They broke above the long-term declining resistance line in January (light crude in June) and climbed above the 2011 top in May (light crude didn't make it at all). It's worth mentioning that crude oil didn't even break above the 2012 top.
Let's take a closer look at the weekly chart.
On the above chart, we see that the NYSE Arca Oil Index bounced off one of the medium-term support lines in the recent week, which is a bullish signal. At this point, it's worth noting that this strong support line stopped the decline in June, which resulted in a rally in the following weeks.
If history repeats itself, it seems that the index will rally once again. From this perspective, the medium-term uptrend is not threatened yet, and the situation remains bullish.
However, we should keep an eye on the above-mentioned support line, because it is also the lower border of the rising wedge. As you know, this is a bearish pattern and if buyers fail, it will likely led to a decline which may take the oil index at least to the lower medium-term support line (the red one).
From this point of view, the relationship between light crude and the oil stocks is also interesting. At the beginning of 2012 both WTI and the XOI formed their tops in the same month (February). However, the oil index hit its bottom earlier and when we saw a recovery in oil stocks, crude oil was still declining. It's also worth noting that in September there were new local tops, but light crude erased fewer losses than the oil index. Although both WTI and the XOI formed their local bottoms in November, the following months showed that oil stocks were much stronger. At the beginning of this year we saw a breakout above the previous local top on the XOI chart, but we didn't see such price action in WTI (light crude climbed above the September 2012 high in July). What's interesting, the oil index extended gains and broke above the 2012 top in May. Meanwhile, light crude is still trading below this resistance level.
Now, let's turn to the daily chart.
From the short-term perspective, we clearly see that the recent decline took the XOI slightly above the 61.8% Fibonacci retracement level based on the entire June - July rally. This quite strong support level encouraged buyers to act and the oil index climbed to 1,373.86 (on an intraday basis) on Friday. In this way, the XOI came back above the previously-broken 50-day moving average, which serves as support now.
Additionally, when we factor in the previously mentioned medium-term support line, it's quite possible that we saw the bottom of the recent correction on Wednesday. In this case, further growth will likely be seen in the coming weeks.
The first resistance level is the July 30 low, the second one is the declining resistance line based on the May top and the July high (currently close to the 1,404 level). If it is broken, the buyers' next target will be the July peak, and then the May top.
Please note that the nearest support zone is based on the Wednesday low and the 61.8% retracement level.
Before we summarize, let's check the relationship between the WTI and the XOI in the short term. In the recent tree months, we saw periods of time when higher prices of crude oil didn't translate into higher levels on the oil index chart. For example, at the beginning of June light crude started its rally which took it to the new local top, but at the same time oil stocks declined from their May top. Despite these negative divergences, the second half of June looked pretty much the same in both cases. We saw a further rally, which led the WTI to a new local high, but in spite of this growth, light crude didn't manage to break above the 2012 top.
Another negative divergence was seen earlier in August. When the WTI entered the current consolidation, oil stocks declined and corrected almost 61.8% of their previous rally. It's worth mentioning that the decline in light crude erased only 38.2% of the previous gains.
Summing up, from the long and medium-term perspectives the outlook for oil stocks is bullish and the uptrend is not threatened at the moment. From this point of view, it seems that the oil index is a step ahead of crude oil. If this tendency remains in place, oil stocks will likely reach new highs earlier than crude oil.
To finish off, let's take a closer look at the charts below and check if there is any relationship between crude oil and gold.
Let's start with the long-term chart.
From this perspective, we see that the perennial rally in both commodities lasted until gold topped in 2008. The yellow metal started its decline earlier, but the correction wasn't as deep as the corrective move in oil. When we saw a recovery in gold, crude oil was still declining and lost almost 80% of its previous rally.
In the following years, the positive correlation between the two commodities remained in place, but this relationship reversed in 2012. As you see on the above chart, gold declined heavily in the recent months, while light crude did not give in to the carnage.
Let's take a closer look at the weekly chart and find out if this correlation is still negative.
On the above chart we clearly see the previously mentioned price action from October 2012 to July 2013. There were several periods when higher prices of crude oil didn't translate into higher prices on the oil index chart.
Let's zoom in on our picture and see the daily chart.
On the above chart, we see that the July rally in gold took place along with a rally in crude oil. Both commodities declined after oil reached its new local top. From this point of view we can conclude that the corrective move in light crude triggered another move lower in gold.
Did this relationship last longer? Yes. The recent upward movement in oil took place at the same time as a rally in the yellow metal. However, this time gold was stronger and, contrary to oil, managed to break above the July top.
Summing up, in the past we saw the price of the yellow metal move higher along with the price of crude oil. As you read, there are periods when this relationship works (in the very recent past), but sometimes it fails (over the long run, in some short-term cases). Connecting the dots, the big question is: will the recent positive correlation remain in place in the near term? For now that seems to be the case, but gold is very close to its medium-term resistance levels after a major breakdown (which means that the medium-term situation is very tense at this moment) and at the same time the True Seasonal patterns suggest strength in the final part of the month. This powerful combination may change the very short-term link between gold and crude oil. It will be very important to watch how gold will react to big price moves in oil which we are likely to see in the not-too-distant future.
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Sunshine Profits‘ Contributing Author
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All essays, research and information found above represent analyses and opinions of Nadia Simmons and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Nadia Simmons and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Nadia Simmons is not a Registered Securities Advisor. By reading Nadia Simmons’ reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Nadia Simmons, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
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