Crude Oil Confirms An Epic Failed Breakdown
From the desk of Thomas Bruni @BruniCharting, via AllStarCharts.com
Crude Oil confirmed a failed breakdown below the 2009 lows last week. This development is extremely important from a risk management standpointĀ andĀ has big implications from an inter-market perspective.
This marketĀ has been in a structural downtrend since late 2014 when prices broke down out of a five year long symmetrical triangle. The resolution out of this pattern was explosive, with prices declining roughly 75% off of the 2014 highs in less than two years. During this decline there has been no reason to be long this market for anything more than a tactical bounce, but with last weekās close above the 2009 lows itĀ is finally feasibleĀ for those with a longer-term time horizonĀ to approach this market fromĀ the long side.
This failed breakdown and bullish divergence could be the start of a longer-term bottom, but more importantly,Ā this development allows us to define our risk. Itās very clear that we only want to be long if Crude continues to close above the 2009 lows onĀ a weekly basis.
The tactical view of Crude Oil over the last nine monthsĀ suggestsĀ that although this market is up over 40% off the February 11th lows, there is still a lot of work to be done beforeĀ a trend reversal is complete.Ā Prices continue to tradeĀ below the downtrend line from the June 2014 highsĀ andĀ a downward sloping 200 day, whileĀ momentum remains in a bearish range.
This distinction between structural and tactical time-frames is important because it acknowledgesĀ that there are headwinds for this market, but allowsĀ those approaching this market from a more structural perspective to express theĀ expectation that the recent improvements in market conditions will continue to buildĀ and eventually lead to a long-term bottom, in a way where their risk is well-defined.
This breakout also has significant implications for energy stocks. The four year daily chart of XLE/SPY represents the performance of the energy sector relative to the S&P 500, which recently began to improve.
In January thisĀ ratio confirmed a failed breakdown below the lower trendline of a multi-year falling wedge which lead to energy out-performingĀ year-to-date. However, this move is part of a much larger pattern which should resolve to the upside if Crude Oil continues to move higher asĀ the weight of evidence suggests. If prices can breakout of this falling wedge, it will likely be the start of a massive move to the upside. Price targets for falling wedge patternsĀ are typically definedĀ by the full-length of the wedge, suggesting that a resolution to the upside could result in a 66% rally in this ratio over the next few years.
The Bottom Line:Ā Nobody knows whether this aggressiveĀ rally off the February lows has marked āthe bottomā in Crude Oil, but the weekly close above the 2009 lows allows market participants to remain long from a structural perspectiveĀ as long as weāreĀ above those lows. Additionally, if Crude Oil prices continue to stabilize and move higher then the out-performance in energy stocks relative to the S&P 500 should really start to accelerate.
It should also be noted that similar structural conditions exist in Heating Oil futures, but were not discussed above. The same risk management applies.
As always, if you have any questionsĀ feel free to reach out and Iāll get back to you as soon as I can. @BruniCharting
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JC here ā Iām 100% with Bruni on this one. I really like how he explained the difference between the daily tactical outlook and aĀ weekly structural perspective. These are two different viewpoints and really stresses how important it is to define your time horizon. Members of Allstarcharts know weāve wanted to be long Crude Oil since mid-February and our short-term upside target was $38, which we are approaching now. But longer-term, Bruni is 100% right. The line in the sand is the 2009 lows. Bigger picture, we would only want to be long if weāre above that.
Also, this Wednesday 3/9/16 is our Monthly Members Only Conference Call. If youāve been considering a 30-Day Risk-Free Trial, now is the time. We are offering a deep discount that only lasts until this Wednesday.
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Tags:Ā $CL_F $USO $XLE $SPY $OIH $XOP $HO_F
The author does not haveĀ a position in the mentioned securities at the time of publication.Ā
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