Friday, February 27, 2009

Has Crude Oil Bottomed?

I'd like to talk about a trade I see developing in the oil market. First I'd like say that picking tops and bottoms in the market is a very difficult thing to do and it also can be a very frustrating way to make a living. Fortunately for me I've been able to identify some major turning points in the market just as the market is changing its trend and I've even posted about such trades right here on this blog. The most recent examples would be the top in the Japanese Yen and the bottom in the Shanghai index. Whether or not I will be just as fortunate with the oil market remains to be seen but I would like to share my observations with all of you so let's get started!

Above is a daily chart of crude oil and as you can see this market has been dropping like a rock since last summer. You'll notice the multiple bullish divergences that have taken place in the MACD which suggests that a rally is possible. One thing I've learned is to NEVER trade based on just one indicator. I've always used other tools and time frames to help tilt the odds in my favor which is why I'd like all of you to take a look at what the weekly chart is telling us.

In the above weekly chart you'll note that the MACD has just crossed to the upside giving us a buy signal. So now we have daily bullish MACD divergences combined with a weekly MACD buy signal. But wait, there's more.

Below is a seasonal chart of crude oil over the last 28 years. Notice how crude oil tends to make bottoms towards the end of February and then begins its seasonal rally.

As you can see we have several indications that the oil market may move higher. We have multiple MACD divergences on the daily chart, a weekly MACD buy signal and a seasonal rally which is due to begin any day now. I like to think of the above charts as pieces of a puzzle coming together giving us a clearer picture of what is to come.

Once again I'd like to say that nobody knows for sure what the market is going to do, but I wanted to share with all of you what I'm looking at so that if crude oil does indeed rally, maybe all of us can profit in some way.


John said...

Very interesting, thanks for putting this together.

I've been looking to look for the right time to go long oil (crude -- not oil companies). What are the various ways to do this? USO seems like the easiest -- do you know of any others?

Anonymous said...

As always, good points eloquently stated and well-supported. (from jonathanks on twitter etc.)

Kevin D said...

I'd avoid USO personally, since it only focuses on the front month. Go with USL, a 12 month rolling.

USO is already under active investigation for the effect it has on the front month price.

alexis said...

thanks for putting this together and posting it. i'm also long USO, in it for the long-haul

Gilgamesj said...

USO is the right oil etf. You can also use DXO or UCO to go double long.

Alan & Beth McManus said...

definitely something I'm interested in following...I just traded in and out of DXO last week...did OK. Oil futures have been red the past couple of sessions and here into the weekend...seems oil is still coupled with the DOW (?) and if we're about to see another leg down on the DOW, oil may not go its own way just yet, imho. I think oil is going to need more than just seasonality to take a ride past $50 or $60. If production cuts squeeze supply enough, we may get back to $70. Again expert here. Just not quite confident of a rally in oil yet. Since I've made this comment here, it'll probably rally on Monday! Thanks for your post. Always enjoy reading your blog.

Johnabi said...

Thanks Kevin. Your thoughts on oil reminded me of an article I read about "how to buy oil". Thought I would share this with the group

Anonymous said...

Thanks for the chart Kevin........One question. What if the daily and the weekly chart are showing different signal. Which one should we follow?

Anonymous said...

Thanks Kevin for this post on oil . Like you say , this is a tough market to call. I like your call on oil, if I was guessing I think the tradeable bottom is going to be upon us very soon. However is your guess that this will be a short term trade or and where do you see the S&P when oil bottoms ?

Chris said...

DXO is another possibility.

Commodity stocks overall seem to be showing signs of relative strength so I am down with this oil trade as well.

Might make sense to play the major producers as well.

Paul D said...

I don't know if anything can rise that much right now...I would look for oil to start rising before the stock market, though.

Anonymous said...

i find it difficult to go with diverging indicators for oil since oil's indicators were diverging even as oil reached its high and dropped to current levels.i find that attempting to find channel lines on intraday charts -usually 60 minutes with use of resistance and support,topping and bottoming patterns on intraday charts and ADX has been very helpful to me to play this highly volatile short term commodity.and currently i still feel bearish and am short oil.we'll see if this was a smart thing to do.


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