Has Oil Hit A Temporary Bottom?

• Commodities in General Remain in a Bear Market
• Oil is Also in a Primary Bear Market
• The Chart That Says That Some Kind of Bottom is at Hand

I last wrote about oil back in early August, in an article entitled More Evidence Of A Commodity Bear Market. Back then, I pointed out some weaknesses in the technical position of the DB Energy ETF (DBE) sector, but did not have enough technical evidence to call it a bear market. Prices consolidated after that and subsequently experienced a false upside breakout. It is perhaps ironic that, around that time, President Trump wrote his famous letter to the Saudis requesting lower oil prices. That fit in nicely with the contrarian idea that politicians are a lagging indicator. In other words, when politicians begin to take action, the prevailing trend has typically run its course. Since that false breakout, the charts have definitely deteriorated, a fact that has been accurately and consistently drawn to our attention by Greg’s recent Commodities Countdown articles and videos.

The conclusion to be drawn from most of the charts in this article is that an oil bear market is a confirmed reality. However, bearing in mind recent coverage of the oil price drop in both the financial and general-purpose media, my contrarian antennae suggest that things have gone too far in a negative direction and prices need to digest recent losses.

For example, the financial press has recently been saying that oil is in a bear market, as it has dropped by the magic 20%. My belief is that the “20%” number is meaningless and has been concocted by the media as a lazy person’s short-cut to meaningful analysis. It makes no reference to things that actually matter, like long-term MA crossovers for technicians or business cycle developments for fundamentalists, among others. It’s also strange how this bearish analysis comes out after prices have taken a great leap to the downside. For example, the following are headlines in today’s Marketwatch: “Record U.S. Russia and Saudi oil production means supply well outstrips global demand:IEA,” “EIA forecasts U.S. shale oil output to climb by 113.000 barrels a day in December,” etc. Bloomberg’s headlines today include “Crude’s Collapse is Sending Shock Waves Across Global Markets.” Whenever specific commodities, including oil, come to the forefront, it’s usually a good time to look in the opposite direction. Before we get to that though, let’s take a closer look at a couple of long-term charts.

Commodities in General Remain in a Bear Market

Chart 1 sets the scene for commodity prices in general, as the CRB Composite has crossed below its 12-month MA and 2016-18 bull market trend line. The long-term KST is also negative. The solid arrows point out that this indicator has had a good track record of calling bear markets. The dashed lines, though, warn that it is by no means a perfect indicator.

Chart 1

Chart 2 points out that the CRB has also completed a 2-year upward sloping head-and-shoulders top and that the Special K has violated its bull market trend line, crossed below its signal line and experienced a series of declining peaks and troughs. Again, this is not a perfect indicator, but with all these indicators moving in favor of the bear, the probabilities of ultimately lower prices are pretty high.

Chart 2

Oil is Also in a Primary Bear Market

Charts 3 and 4 repeat the same arrangements used for the CRB, but this time substituting West Texas Intermediate. The same indicators are bearish, with the exception of the KST in Chart 3, which has only tentatively crossed below its MA unlike the more decisive break for the CRB.

Chart 3

Chart 4 also offers a classic example of how a false upside breakout is typically followed by an above-average move in the opposite direction. That sharp drop, with a simultaneous violation of the two trend lines and 200-day MA, offered classic confirmation of the whipsaw.

Chart 4

Chart 5 offers supplemental proof in the form of the iShares U.S Oil Equipment and Services ETF, the IEZ. This oil price-sensitive index has just broken down from a 14-year top.

Chart 5

Admittedly, this is the most bearish oil-related equity chart that I could find. However, even the SPDR Oil ETF, the XLE, has violated a key Special K uptrend line as well as its signal line. That suggests that the support being offered by the 2009-18 uptrend line, as well as the smaller horizontal one for the price itself, will soon give way.

Chart 6

The Chart That Says That Some Kind of Bottom is at Hand

Having laid out the long-term bearish case for oil. I keep coming back to widespread bearish sentiment, as witnessed by the countless media stories I referred to earlier. Chart 7 backs up this idea, as it features a 10-week ROC of a key oil sentiment indicator, the Oil VIX. I am a great believer that the rate-of-change of sentiment can be just as important as the level itself when calling for a trend reversal. In this instance, the ROC has run up to an extreme reading in excess of 75. The green arrows show that previous reversals from at or above the black horizontal line have been followed by some form of rally. We shouldn’t read too much into this, as the indicator continues to advance and some of the previous signals have been a tad early. However, the ROC is clearly close to a reversal signal, certainly in terms of time.

Chart 7

Finally, Chart 8 shows that Wednesday’s action was a bullish inside day, following Monday's apparent selling climax. Please note, that this article is going to press at 3 p.m. EST. Consequently, we will not know for sure until the close whether Wednesday's action was completely inside Tuesday's wide trading range. Inside days, if they work, are only expected only have a positive or non-negative effect for between 5-10 days. In this case, that would be more than enough time to see a reversal in that 10-week ROC reversal in the oil VIX.

Chart 8

These latter two charts lead me to believe that, while the oil price does not necessarily have to rally a lot, it’s still likely that Monday’s low will hold at least until the turn of the year.

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.