Crude Oil Trap

By: Bob Loukas | Mon, Mar 14, 2016
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Dangling a Carrot

The price correlation between the Crude and equity Cycles was on full display last week. The only real difference is the relentless nature of Crude's surge higher. Crude was so oversold and bearish sentiment so elevated, that its march higher from the Investor Cycle Low has been unyielding.

The action appears to be a classic bear market squeeze, as traders who bet big on a continued decline have been forced to cover their Shorts. And in the process, Crude's mood has quickly turned. The mood was bleak and extremely bearish just a month ago, but we've now begun to hear opinions that the bear market has ended and that Crude has seen the bottom.

Don't believe it. In my opinion, the current bear market is still in its early stages, and the current move higher is just a sentiment-clearing event. I will concede, however, that the move higher is strong enough that it is likely to continue for some weeks. I am targeting early April for a top. In the shorter term, however, there is the potential for a Daily Cycle Low (DCL), one that will shake the confidence of the bulls.

Light Crude Oil Daily Chart

The size and speed of the rally in energy producers - over 30% in a few weeks - confirms that a new Investor Cycle (IC) is underway. As a result of the move, the percentage of energy sector stocks showing a bullish P&F (BPENER) chart has hit a record 95%, matching levels not seen in many years, if ever. The BPENER level is a testament to the extreme nature of the recent rally, and provides a reason to be cautious now.

In the past, every Crude IC top has corresponded with a BPENER level of over 80%. It's well over that now, but since it appears that the current rally has serious speculative power behind it, I believe that the current elevated reading is likely to persist for some weeks. Still, the level of the indicator suggests that Crude Oil has entered the topping area of the IC, and it is unlikely that the current IC can continue more that 3-4 weeks higher.

S&P Energy Sector Bullish Percent Index Weekly Chart

The weekly and monthly charts always allow us to better understand short-term action. They also provide needed perspective to day and swing traders, who can form powerful and unfounded biases from their observations of short-term moves.

This recent Crude rally has been both powerful and convincing, but we must appreciate that it is only a short-term rally. On the weekly timeframe, it is an inconsequential blip in a much larger and more enduring bear market decline. Just 4 weeks removed from a 17-year low, Crude has given us only a mean-reversion rally so far.

Light Crude Oil Weekly Chart

 


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Bob Loukas

Author: Bob Loukas

Bob Loukas
The Financial Tap

Bob Loukas is the founder of "The Financial Tap", a membership site dedicated to helping traders and investors navigate the markets while increasing their expertise and understanding. Bob has over 20 years of experience in trading the markets, is a life-long student of economics, and has an abiding passion for the financial markets. Much of his investment philosophy is top-down in nature, beginning with a global and macro outlook which is used to create a framework that drives his intermediate investments.

Bob is a leading expert in Market Cycles. His love of Cycles grew after his introduction to the work of Walter Bressert, one of the pioneers in the field. Cycles were a natural fit with Bob's passion for top-down analysis. As Cycles are intertwined on multiple time frames, understanding the global outlook greatly helps him to identify the long dated Secular Cycles. From that point Bob is better able to identify the shorter Cycles and to build a cohesive investment strategy. Bob's Cycle Analyzer, a software based analytical and intelligence system, is used to predict the future movements of the major financial markets.

Originally from Sydney, Australia, he is now settled and has been working in New York City for the past 13 years. His background and education is in Computer Sciences and he holds a bachelor's degree from Monash University in Melbourne Australia. He has extensive experience in the Financial Software area and has served as a senior executive at various Fortune 50 management teams developing financial trading and reporting software.

Happily married with two children, family is a big part of his everyday life. Other passions including golf and long distance running. He plans to complete the 2012 New York City marathon.

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