Tuesday, September 3, 2013

Crude oil continues to look bullish

I've been bullish on crude oil for many months. Prior to Syria becoming a big concern, the chart had already looked very compelling (another case of price leading news?).

Price broke out of a triangle formation in June, pulled back (a common occurrence) and then resumed its ascent, easily getting through the $100 level. For the last several weeks, crude has been trading between $104-$108 forming a pennant/flag pattern. Pennants/flags are typically continuation patterns meaning after they form, the breakout usually occurs in the direction of the current trend -- in this case up. In fact, last week price did breakout only to pull back (again, as in June, a common occurrence post-breakout).

Source: Stockcharts.com

As I've written in the past, equities typically lead their associated commodity. The chart above shows the Guggenheim S&P 500 Equal Weight Energy ETF (RYE, black line) versus crude WTI (red line). I prefer to use equal-weight sector ETFs to avoid the excessive influence of large-cap stocks. RYE remains in an uptrend with crude oil catching up to energy equities in late June into July. RYE has actually been basing since May, not able to get through the $76 level, but nonetheless its chart remains bullish. In addition, note that crude oil continues to trade above its 50-day MA (blue line), another bullish indication.

What is beginning to worry me is the sentiment on crude oil. Ned Davis Research has its latest Crowd Sentiment Poll for Crude Futures at an elevated level, but not extreme and still within neutral terrain. However looking at COT positioning, commercial hedgers -- typically the smarter money -- have not been this bearish in years.

As always, stay tuned.

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