Oil vs Wheels (IYT,USO)
It’s the interplay between the following two factors that we’re keeping our eye on these days, the better to apprehend the market’s immediate trajectory: oil and ‘market leaders’.
We’ve discussed this combo before, and how they work together.
The ‘leaders’ are the current sexy tech group, not related to oil directly, being themselves more a gauge of investor sentiment toward equity investing in general. The transport stocks, too, are leaders; as a group they indicate where equities are likely headed, because shipping arrangements have to be made well in advance when new orders arrive at the factory.
In fact, shipping details and contracts are normally finalized anywhere between one and six months prior to industrial orders actually being produced. And that advance warning gives us some lead time into understanding market direction over the intermediate term.
That said, the whole ball game gets thrown a curve when oil prices are in flux. As the sector that’s most reliant on energy inputs, transportation stocks can be thrown into a tizzy when crude futures are trending fast.
When they’re stable, of course, the game is a whole lot easier to play.
So the question is, which way are energy stocks headed at present?
Part of that answer lies in the charts and fundamentals of the energy sector itself. And part, of course, resides in the movements of the ‘leaders’ and the trannies, whose stock prices are already discounting, to some extent, expectations in the oil market.
It’s a two way street.
Below, we unpack it all for you with our traditional comic genius and lively mail-order wisdom.
Let’s start with oil.
This is the monthly paste-up of the United States Oil Fund (NYSE:USO), a proxy for NYMEX Crude, over the last five years. And it clearly shows that the bottom for oil was put in back in February of 2016. Since then, a slow move higher has been on.
The short-term monthly moving average is now scooping price (in blue), RSI has surfaced above its midway waterline (in green), MACD is between roughly a month and six weeks from confirming, and the whole bottom-scraping, two year turn higher has played out against a massive turnover in shares (in black) – as good an indication as you’ll get of accumulation.
Now have a peek at the weekly.
Here, we outline the simple Fibonacci retracement numbers (in blue) from the lows through this May’s high at $14.74.
They indicate that the stock could still fall, either to $12.41 or $10.98, and that prognosis is supported both by 1) last week’s closing candle, a ‘qualified’ shooting star, and 2) that of four weeks’ back, a bearish engulfing pattern (see insert).
A brief explanation is in order here, as the shooting star generally appears at the top of a long rise, and not several pegs down the ladder as this one has. But this could also be considered a ‘long upper shadow’ candle, an equally bearish candle formation, so we’re letting it be to push the bearish story a wee bit further.
Finally, the weekly RSI indicator (in green) looks ready to splash against its waterline, a development that would likely trigger additional net selling in the weeks to come.
Monthly, Weekly and …
Finally, have a look at the daily chart for USO.
What’s prominent for us is the gap that needs filling between $12.75 and $13.00 (blue circle).
It’s very likely we’ll get that covered in the days ahead. With RSI and MACD solidly below their respective waterlines (in green), we’re clearly in a bear trend. The only question remaining, again, is whether the upper or lower Fibonacci retracement will offer real support. Those lines are penned in red.
Baked into the Transport Pie
It could be we’re already seeing the transports responding to the continuing down-trend in oil prices, as they’re giving every indication that they’re headed higher.
A look at the chart shows ongoing strength.
The transports struggled while oil was on the rise, as one would expect. But a cautious, sustained buying regimen began to push the sector higher beginning in early May. We now see price moving confidently above all her moving averages, with all those same MAs unfurled and trending higher – a very positive sign.
New support levels are being set (in blue), and both RSI and MACD are supportive of further gains, with neither one close to registering ‘overbought’ (in green).
The only challenge remaining for the transports is determining how fast it arrives at its former, all-time high of 11,400, and, of course, how reacts once it gets there.
There’s little doubt, however, that we’re on our way.
Pat on the Back From Tech
There’s little doubt, too, that investors are still enthralled with the leading names in the market. A look at the NASDAQ Composite shows there’s been no let-up at all of late; with new highs struck last Thursday, the enthusiasm is proving itself contagious.
Have a look –
What’s perhaps more exciting for the bulls is the following chart, which shows a broad interest in the advance. This is plainly not a narrow, FAANGs-led advance, by any means.
When all is said and done, we may be in for the surprise of all surprises in the coming weeks. And we want to be ready for it today.
The trade we’re offering this week is a bet on the continued bearish bias in the oil pits against a rising transport sector. It’s based on the foregoing, as well as the possibility of a surprise emerging from this Friday’s big OPEC meeting.
While the likelihood of a bullish surprise is almost nil, forces are now militating toward a supply surge, particularly from Saudi Arabia and Russia, a move that would sink prices quickly as the news gets digested, and push investors toward purchases of transportation shares.
And that’s where we’re parking it today.
We’re playing it using the above mentioned USO and the iShares Transportation Average ETF (NYSE:IYT).- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you purchase the USO August 17th 15 PUT for $1.94 and sell the IYT August 17th 189 PUT for $1.95. Total credit on the trade is a penny.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Note well, the long USO option is better than 12% in-the-money, while the IYTs are nearly 10% out-of-the-money.
With kind regards,
Hugh L. O’Haynew