Oil May Be on the Verge of a Major Breakout

Last week, I featured three energy-related ETFs as part of an article on the bond market, as they had just broken out on a short-term basis. Chart 1 shows that those breakouts have held so far. This week, though, I'd like to take a deeper dive into the crude oil price, since the charts are suggesting that something technically very important may be about to happen.

Secular Bull Market Underway?

What I am alluding to is the possibility that crude oil may be on the verge of confirming that a new secular or very long-term bull market began last spring. Something very unusual, perhaps unique in commodity pricing history, occurred at that time. A storage shortage caused the spot oil price to temporarily sell at a negative price. That means that producers paid consumers to take the oil away, completely the reverse to the normal way of doing business. From a contrarian aspect, that's a big deal. It compares, say, to the emperor's palace being valued at a higher level price than the combined value of Californian real estate at the height of the Japanese real estate boom. Alternatively, we could compare it to reports claiming that Price Line's total valuation at the end of the tech boom was greater than the market cap of all the airlines combined. These examples point to unusually unsustainable out-of-whack phenomena that all too often characterize secular turning points.

Chart 2, features an oil price series spliced with West Texas Intermediate Sour back to 1890. It shows that it has a habit of consolidating for a decade or so, subsequently breaking out to a new plateau. The numbers 1-4 represent these rangebound periods and subsequent breakouts. The fifth example has been augmented with a question mark, as a decisive breakout has not yet materialized. Also, the price has only been updated through June 7, so it lacks the end-of-the-month data required by this monthly chart for an official plot. Even so, the chart clearly reflects a market that could be close to a major breakout.

The three green arrows indicate that, when the PPO crosses above its 48-month MA, it's usually a reliable sign that a new secular bull market is underway.

If you refer to Chart 3, which focuses on a more recent period, you can see that the PPO has begun to turn up once again. However, it has not quite managed to cross above its MA. This, along with the fact that the price is right at its secular down trendline, again underscores the possibility that oil may be on the verge of an historic breakout.

Chart 4 compares the West Texas Sour to the West Texas Intermediate Crude ($WTIC) carried by StockCharts. Both are positioned right at their secular down trendlines and have crossed above their 96-month MAs. I like that timespan for long-term technical work because it covers the approximate length of two business cycles. Also, as shown by the blue arrows, it has been an important support/resistance point for both series.

The Primary Trend

Chart 5 compares the $WTIC (top window) to its relative strength against the S&P Composite (third window). The price crossed above its 65-week EMA some time ago and recently cleared that 2014-2021 resistance trendline. Since the long-term KST is bullish, I am expecting it to build on that breakout. What's really intriguing though, is the fact that the RS line is right at the 2013-2021 down trendline. It's a pretty significant one, not only due to its length and relatively low angle of descent, but the fact that it has also turned back many rallies along the way. A successful penetration would be a very important technical event. A breakout seems likely because the  KST for relative action, in the bottom window, is bullish. It looks as if it has already had a large rally, but this indicator has yet to reach zero and is therefore by no means overextended.

Energy ETFs

The SPDR Energy Fund (XLE) is the largest energy ETF, but Chart 6 shows that it has not necessarily been the best performer, as all the ETFs featured in the chart have recently outperformed the black horizontal line representing it. I am always a bit reluctant to get involved with overextended markets, but it is a technical characteristic that, in any group, leaders have a tendency to continue to lead. In this instance, we have two overall winners, the First Trust Natural Gas ETF (NCG) and the VanEck Vectors Unconventional Oil and Gas ETF (FRAK). Using the four-window format we used for Chart 5, let's see if these two ETFs are overextended on from a primary trend perspective.

Chart 7 shows that the FCG has broken out on both an absolute and relative basis. That demonstrates this ETF is leading the oil price because the $WTIC has not quite broken out on a relative basis. The FCG may be a tad overextended on the daily charts, but this weekly one is suggesting that the major trend is positive and has lots of unrealized potential.

FRAK (Chart 8) has also broken out on an absolute and relative basis, but the break has so far been tentative. Both KSTs look as if they have had a huge rally, but the absolute one, in the second window, has only just crossed above zero, whereas its RS counterpart is still below this equilibrium point.

In summary, oil may be on the verge of a major breakout, which would confirm a secular bull market should it take place. Both oil and some energy-related ETF's look poised to signal an extended period of superior performance against the S&P Composite.

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 Groupof Walnut Creek or its affiliates.