Crude Oil in All Time Frames

by Tom Aspray

The impressive stock market gains on Friday helped to erase most of the losses from early in the week and turned the short-term momentum back to positive. Still it is not enough to indicate that stocks have begun a major new uptrend as the negative divergences discussed on Friday still need to be resolved.

It was a much different week for crude oil as it closed higher each day, closing the weekly with sharp gains. Since the late August high of $104.94, the January crude oil contract had dropped almost 15% into the late November lows of $91.77. The severity of the decline on the daily charts might have convinced many that the major trend was down.

This reinforces the need to examine all time frames to get a more accurate picture of a market’s direction. This is one of the reasons that several times a year I look at the yearly charts analysis to identify the key year levels to watch.

The January crude oil contract closed on Friday October 18 at $100.88, which was below the quarterly pivot at $101.11. This was the start of its sharp slide into the late November lows. This was consistent with a negative short-term outlook while the longer-term time frames still pointed higher.

This has added further confusion to investors in the energy sector as collapsing crude oil prices often have more of an impact on the energy stocks. Two of the key energy stock ETFs have lagged the Spyder Trust (SPY) so far this year but have done much better than crude oil. So where are the energy stocks and crude prices headed as we move into 2014?

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Chart Analysis: The yearly performance chart shows the sharp divergence between crude oil and energy stocks in the last quarter.

• Crude oil price performance peaked in early September at +16.4% for the year as it was outperforming the Select Sector SPDR Energy (XLE) and SPDR Oil & Gas Exploration ETF (XOP).
• Just two weeks later, crude oil was acting weaker than these two ETFs, as well as the entire S&P 500 energy sector as highlighted by the circle on the chart.
• By the end of November, crude was down 3.7% for the year while the XOP was up 21% and XLE had gained just over 17% for the year.
• The gains last week have pushed crude back into positive territory for the year but it is still much weaker than the two ETFs.

Across all time frames, the daily analysis for crude oil is positive but the weekly OBV is still well below its declining WMA.

• On the monthly chart the recent decline appears to be just a pullback within the gradual uptrend, line b.
• The quarterly pivot for January crude oil is at $101.11 with the monthly pivot at $93.81.
• There is next monthly resistance in the $105 area with major resistance in the $110 to $112.49 area.
• The monthly downtrend is at $111.37 along with the monthly starc + band at $116.72.
• The move in 2013 above the 2012 yearly high at $110.55 is a bullish development.
• The monthly on-balance volume (OBV) is still holding above support at line d and a move above its WMA would be bullish for prices in early 2014.
• There is monthly support in the $91.77 to $92.56 area.

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The SPDR Oil & Gas Exploration ETF (XOP) dropped 1.7% on Friday primarily due to over a 6% decline in SM Energy (SM).

• The weekly close was just below the 20-week EMA at $66.40 with the monthly projected pivot support at $65.38.
• The breakout level, line a, is also now being tested.
• The quarterly pivot is at $64.22, which was last tested in early October.
• The weekly starc- band is at $62.15 with the long-term uptrend, line b, now at $60.66.
• The relative performance dropped below its WMA in early November.
• The RS line dropped sharply last week and looks ready to test support at line d.
• The weekly OBV closed just below its uptrend, line e, this week.
• The OBV has therefore reversed sharply from the highs in October.
• Initial resistance is now at the monthly pivot at $68.37 with stronger in the $70-$72 area.

The Select Sector SPDR Energy (XLE) is up 22.7% YTD versus a 28.6% gain in the Spyder Trust (SPY).

• XLE is still holding above its rising 20-week EMA at $84.71.
• The weekly starc- band and uptrend (line f) are now in the $82.41 area.
• The relative performance is now testing major support at line g, so this week’s action is important.
• The weekly OBV shows a strong uptrend, line h, that goes back to the June 2012 lows.
• The OBV has formed a clear pattern of higher highs in 2013.
• The daily OBV (not shown) does show a negative divergence from the October highs.
• There is first resistance now at $87.30-$88.24 with the weekly starc+ band at $91.53.

What It Means: The daily, quarterly, and yearly analysis of crude oil is positive while the weekly is negative. Therefore, the strength of the current rally will be important as it needs to be strong enough to turn the weekly analysis positive.

The action in both the SPDR Oil & Gas Exploration ETF (XOP) and the Select Sector SPDR Energy (XLE) has been disappointing and the strength of the next rally will be important. If it fails to overcome, I will look to reduce the positions in these two ETFs.

Many of the individual energy stocks like Phillips 66 PSX +1.31% (PSX), which is part of our portfolio has done much better than the ETFs. It and other energy stocks are acting much better technically, and I will be looking at these stocks for new buy candidates as we head into 2014.

How to Profit: No new recommendation.

Portfolio Update: Should be 50% long SPDR Oil & Gas Exploration ETF (XOP) from $66.04 with a stop under the October lows at $64.53.

Should be 50% long Select Sector SPDR Energy (XLE) from $86.71 with a stop under the seven week lows at $84.86.

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