To continue with the recent post about the esteemed WSJ finally turning bullish on commodities – crude oil currently is quite concerning. Another previous post, this time from 1/21/17, laid out my concerns:
“….my outlook remains that we will see a secondary test of the $26 secular low, but at a much higher low. Crude oil is in a major accumulation area, but this bottoming process will take quite awhile. Energy prices in general are very bullish long term, it’s just that crude itself has alot of competition now and alot of technology – tho increasing high-yield interest rates will be helpful to knock out some of the weaker fracking companies. Oil production is very capital intensive – the fracker’s supply growth needs both high enough prices and low interest rates. It’s not just prices. And this whole green energy hysteria/government edict/carbon taxes (Trump notwithstanding) is a tough barrier for basically the internal combustion engine and the use of crude oil. But this is looking way down the road, and in the meantime there are potentially bullish geopolitical factors. A selloff in oil and a re-test would be very helpful to strengthen the market. There is a very large speculative long position in crude oil futures currently, and a break of support, like $49.50, will start to trigger sell stops.”
There was a “very large speculative long position” in late January, and it kept growing. It has been cut back a bit, but is still very large (middle of the page). And there was another record high in crude oil inventories, neither one of these is bullish. There is plenty of room for more sell stop runs and new short positions to be added. The next very big area for sell stop runs (support) is $42.20-70. I was too early expecting a bigger top in crude around the $51 resistance area late last year, and it continued higher with the euphoria arising regarding the magical powers of Donald Trump. There is a lot of room for disappointment in many markets. I have zero confidence in the President’s omnipotence. So now the re-test for crude oil gets dragged out further, with all of the new weak handed shorts which entered the crude oil market. Even more concerning is the intertwining of all markets, with a potential new surge in junk bond yields ( falling prices). Crude oil, frackers, and junk bonds are intertwined. And junk bonds are intertwined with the stock market, other commodity producers, and numerous industries. We saw these effects in the Nov. ’15 highs in most markets, and then to around Feb. 10 ’16 into the lows. What’s interesting in that time frame, was which markets actually bottomed ahead of time. Gold bottomed in Dec. ’15 and the miners (all types as a group) bottomed in Jan. ’16. Also in January were base metals, emerging markets, Australia, Russia, and the oil shares. While the big stock markets, like the Dax, and crude oil and junk bonds all bottomed around Feb. 10th. And most of the things which bottomed first had much better performance last year (until year end) than did the major stock markets, especially the smaller stock markets priced in their own currencies.
So let’s keep in mind what happened last year, especially with the US$ and currencies. The $ put in a spring low (“break of support”) on May 3, and the USDJPY had a selling climax on 6/24 (Brexit). The USDJPY then went into an accumulation area with the surge beginning on election night, basically in line with gold, which had a buying climax also on 6/24. The beginnings of a major topping process in the US$ is likely this year, but the process, similar to around 2000, can last quite a while. So the potential for the major topping process in the $, will lead to choppiness in the other currencies. The Yen is bearish long term, but choppiness (trading opportunities) will setup. Here are the intermediate term looks for the $ with the upthrust thru 101.74, and the current shorter term trading range. And the USDJPY also in a trading range. But the main thing driving the $ right now is the Euro, and a shorter term rally now, but setting up a big contrarian low later this year with all of the political/bank weirdness. And speaking of weirdness, we in the US have our own upcoming – with the debt ceiling crap again. Super.
Leave a Reply