Crude oil: Breakout or fakeout?

After treading water for the past year, crude broke out of resistance last week. But a technical look is necessary to decipher the market's next move.

By Jun 20, 2013 2:28PM

copyright Kevin Phillips, Digital Vision, age fotostockBy Tom Aspray

The global markets have provided their initial verdict on the FOMC announcement and the comments from Fed Chairman Ben Bernanke at his press conference. The comments were pretty much what I expected: if the economy gets better, they will reduce their bond buying; if it doesn't, they won't.

The markets are reacting in a panic mode and stocks and gold have plunged. Rates have continued to move higher as the yield on the 10-year T-note rose to 2.311% from an early May low of 1.631%.

Wednesday's close completed the reverse H&S bottom formation on the T-note yields. The similar formation for T-bond yields was completed in May.

Historically higher yields are not negative for stocks, especially at current levels. In fact, bond holders who can no longer stand the capital loss in their bond funds are most likely to turn to stocks. As I have written before on the MoneyShow, I think bond yields are likely to see a pullback this summer, which will provide another opportunity to adjust your bond portfolios.

The recent improvement in the market internals suggested that the correction was over. It will be important that the June lows do hold. Crude oil broke out of resistance last week and it often leads the stock market, but was this a fake out?

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Chart Analysis: The comparative plot of crude oil and S&P 500 highlights several times when crude led the S&P 500 both higher and lower.

  • On February 22, 2012, crude oil peaked (point 1) while the S&P 500 did not make its high until early April.
  • The S&P 500 made a secondary high in early May before prices collapsed.
  • Stocks bottomed a month ahead of crude in the summer of 2012 but both peaked together on Sept. 14.
  • Crude oil bottomed first on November 7 (point 3) but the S&P made its low a week later.
  • Crude oil has diverged from the S&P 500 for most of 2013 as it had formed lower highs, line a.
  • Last week crude oil closed above this resistance (point 5).

The weekly chart of crude oil is updated through the close on June 19 and shows last week's close above the resistance at line b.

  • There is first support now at $96-$96.50.
  • The more important level of support is at last week's low of $94.
  • The on-balance volume (OBV) has held support, line e, so far this year.
  • The OBV is back above its WMA but is still below its recent highs.
  • The OBV is well above the 2011 highs so has been acting stronger than prices.
  • There is next resistance at $100 with the downtrend from the 2011 highs, line a, at $103.60

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The SPDR S&P Oil & Gas Exploration (XOP) is a well-diversified ETF whose top ten components do not make up more than 1.6% of the ETF. It has an expense ratio of 0.35% and yields 1.18%.

  • XOP peaked at $63.30 in May and hit a low of $59.22 (line a) last week. This was decline of 6.4%. 
  • The quarterly pivot is at $59.07 with the longer-term uptrend, line b, at $55.65.
  • The short-term downtrend was broken on Tuesday with the 20-day EMA now at $60.60.
  • The relative performance shows a solid uptrend, line c, indicating it is leading the S&P higher.
  • The weekly RS line has also moved above its WMA.
  • The daily OBV broke its uptrend from the late 2012 lows, line d, last month.
  • The OBV is below its WMA while the weekly is above its WMA.
  • Short-term resistance now at $61.82 and then $62.40ron

Chevron Corporation (CVX) is a giant $233.6 billion dollar oil company with a current yield of 3.30% and a current ratio of 1.58.

  • CVX had a doji high on May 28 of $127.40, and the following day, an LCD was triggered. 
  • The early June low of $118.66 was a 6.8% correction from highs that came close to the uptrend, line e.
  • The 38.2% Fibonacci retracement support is at $117.20 with the 50% level at $114.04.
  • The relative performance has just made new lows for the year and shows a clear downtrend, line f.
  • The OBV did form a bearish divergence at the recent highs, line g.
  • This was confirmed by the drop below the prior low as the OBV is testing its uptrend, line h.
  • There is short-term resistance at $122.98 with the quarterly R1 at $124.41.

What it Means: The typical seasonal pattern for crude oil (MoneyShow) is for it to bottom in February and then top out in late August. The close in crude oil this week will be important as a major reversal will call last week's breakout into question.

The daily technical studies on both SPDR S&P Oil & Gas Exploration and Chevron Corporation need further improvement to confirm that the correction is over. I still prefer XOP over the Select Sector SPDR Energy because of its diversification. I will be watching all of them closely.

As for the overall market, have a plan for your holdings as opposed to following the "Fed Whisperers" (MoneyShow).

How to Profit: No new recommendation



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