Oil Still Not in Good Shape – $42 to $40 target
Oil has surged recently but currently trades at the top of a descending channel. It has been consolidating there for several sessions. A pop above the consolidation is possible within the next week, but over the next month I expect oil prices to decline back toward the bottom of the channel at $42 to $40.
While a breakout above the descending channel would be a positive thing, there are a couple things which have me leaning more toward the decline.
- The high number of speculative long positions after the recent run up (green line along bottom of chart above). We are approaching the same speculative COT levels we saw in February which marked the top. If the speculators are all in the longs already, who is left to keep buying? That said, this isn’t a perfect tool, and speculative buying could keep increasing pushing the price up, but the buyers look to be stretched a little thin in light of the other evidence.
- Another piece of evidence is the oil stocks themselves. S&P Oil & Gas Exploration and Production ETF (XOP) has been under a lot of pressure lately, and continues to decline within the confines of a descending channel. Target: $29 to $28.
- While the divergence between XOP and oil is somewhat relevant just by looking at the charts, the ratio of XOP/Oil-futures shows that the stocks have been underperforming oil. If oil were to enter a strong uptrend, the opposite should be happening. In strong oil uptrends, XOP should be strong and the ratio should be rising showing wide-spread buying interest in the sector. Right now, that is not happening.
There are some parts of the energy sector that are doing better than others. For example, some of the pipeline stocks are doing quite well. I had some positions in these earlier in the year, but have since liquidated them as the prices were starting to look quite inflated relative to earnings.
Eventually there will be a better buying opportunity in this sector. Right now just doesn’t seem to be it. The stocks are unloved, and oil is at a point where it could head lower, putting even more downward pressure on those stocks. Before buying with any vigor I would want to see some of these negatives start to turn around.
By Cory Mitchell, CMT
Swing trades are trades that last several days to several weeks, and capture short-term bursts of momentum. Since many of these oil stocks do have big swings, both up and down (although, right now mostly focused on the down), there are swing trading opportunities in this sector and in others. Interested in learning how to swing trade stocks? Check out my Stock Market Swing Trading Video Course.
Disclosure: I have a short swing trade in oil. I have one oil stock in my long-term investment portfolio.