The Great Oil Catastrophe
Dear Trader,
What do you do when your favorite trending stock pulls back from its latest all-time high? Do you buy the dip? Or do you ride the rollercoaster down. It’s a classic dilemma, but a very relevant one today.
You know what I’m talking about if you’ve been watching oil prices and energy stocks lately. Today I want to break down why you need to watch the trend in energy stocks very closely. It could mean the difference between empowerment and fear when it comes to the opportunities this sector represents right now.
The current state of the energy markets
We see the oil prices pulling back. This has been the trade that has worked all year. Even when bonds have failed, when stocks have failed, when S#@+ has hit the fan, energy and oil have been the one trade that has worked out.
And whenever you see a long running trend, you really want to take advantage of it. That’s one of the reasons I put together an action plan. However, this plan isn’t just about buying the dips.
That’s because something cataclysmic has happened to the sector…
47 of the 49 companies in the XLE, XOP and XES are now trading with a 50-day
moving average that has shifted into either neutral or bearish trends. You know my
rule about this…. 2/3 chance the trend continues its bearish moves.
That’s why I put together my energy action plan for my Night Traders. Without my action plan to help your portfolio, you’re in a fight against a market that shows no remorse .
A tale of two markets
Let me paint a picture here of two key commodities, beginning with the Brent Crude Oil – Continuous Contract.
For those of you who are unaware of what a continuous contract is, Think of the VIX. It takes into account 16 different options contracts on the S&P, pulls the data together, and creates a synthetic at the money option that is 30 days from expiration.
A continuous contract on oil does something similar to that. It pulls the data together, cleans up the noise, and makes the information more digestible for when we find our trend.
Gas Prices were at a high just a few weeks ago, you can see that reflected in the spike we are seeing in the chart when oil screamed up to $140 a barrel.
Oil tapped the $100 mark on Thursday after crude inventories showed a build for the week. We are watching the commodity itself teeter on round-number support and the market’s definition of a bear market correction (20% from its highs).
If you’re watching the continuous contract, we broke below $100 on Thursday and then closed at $99.90.
The parabolic move in oil prices over the last two years has widened the gap between oil and the technical measure of a bear market.
As a matter of fact, there is still another 20% of potential movement lower before oil moves into a technical bear market when you use the 20-month moving average as your indicator. This means that in the scope of the intermediate-term outlook, the trend in oil could proceed lower.
The trend has really been our friend on Oil for the past two years but let’s zoom out even further to see the bigger picture.
This pulls us out to 2003. We can see a historical trend that has started to repeat itself. Take a closer look at 2008, this looks nearly identical to what we see for today oil.
In 2008 oil prices reached their high of $140 just like we are seeing now. Within just a few months the markets corrected itself. Oil pulled back to its 20 month moving average dropping from a ludicrous $140 down to $90 a barrel.
Once we saw oil officially move into a bear market it dipped even lower eventually bottoming out at $40. This is because of the effect of the recession which causes demand to go down.
Right now, with the possibility of a recession on the table, there are plenty of long term opportunities to buy shares of these companies as they come down. Even Warren Buffet is filling his portfolio with companies heading to their bottom.
I don’t know about you but, having the expendable income to be able trade that way could be difficult with the uncertainty we are seeing.
Long term investments are great… in a bull market.
I’m not here to make money in the next 5 years on one stock, I’m here to trade the market where it’s going in the next 6 weeks to make you money to supplement the cost causing you pain every time you have to fill up your tank.
We are in a transitional period for oil. A lot of people are still bullish on oil. Just like I said at the end of last year, the market was moving lower. Now, oil will follow suit as we continue towards the recession.
This is the time the Energy Action Plan is going to attack. Every single week we are break down what is arguable the hottest sector to be trading right now and giving you the trades that will show you where to be long and where to be short.
It’s a goal of mine to get your gas money back but I can’t do it for just anybody, we are trading this with my Night Trader crew and they are going to be in the trenches with me following my direction so there is no guess work just profits opportunities.
Have a great weekend,
Chris Johnson
Quantitative Specialist, Penny Hawk
Comments
July 08 2022
