Living in the oil patch I receive more questions about the price of oil than anything else (with the exception of when I think the stock market will crash again.
Answer: probably not any time in the next few months). Let me take a peak and give you some thoughts. The past couple of months we watched oil top out at just over $52 per barrel on West Texas Intermediate and has since been in a slow, painful slide to around the $40 level as we begin August. The prognosticators and so called experts are all over the map with where they believe future prices may be headed. I’ve heard $75, and I’ve heard $25. But no one really knows.
I could discuss the fundamentals, but those in the industry know the fundamentals much better than I. I’m a technician, and believe the fundamentals are eventually expressed in price. I base my judgments on price behavior, using about a dozen easy to read indicators as my guide.
The drop from the $52 mark in late June to the $40 level today has been with some conviction. In other words, the big boys are pushing prices lower. The price won’t head meaningfully higher until the sellers are done, and there is no indication they have thrown in the towel just yet.
Believe it or not, it would be best in the long run for oil if traders pressed the price back down to the $33 - $34 area one more time to wash everyone out. If we would go back to the scene of the crime and hold, it could finally have the opportunity to begin a more meaningful and lasting move higher. Of course, if price runs through $33 and keeps heading lower, all bets are off.
So the question is when and where will this nightmare in oil end. As for when, it appears to me that we are moving into the latter stages of this two year correction in oil. But for everyone living in the oil patch, the latter stages can feel like an eternity.
As for where the slump will end is anyone’s guess. It could be in the $35 area where there is a very glaring gap that eventually should get filled. Or it could be back at the previous low around $33. Or it could be lower. Yuck. No one wants to think about that, and I would place the odds of sub $33 as very low, but we should be prepared just in case. The truth is we will know where the bottom is in oil only after the fact.
Now if you are invested in oil and worried about where this sell off might end, I would give it some rope to the $33 area before I begin hitting the panic button.
If on the other hand you aren’t invested in oil but want to be, I would suggest you wait until a definite floor is in, and not a day sooner. There should be an extended period of backing and filling once the bottom is solid, and you should have ample opportunities to load your boat up during that time.
So your takeaway is that from a purely technical perspective, now is still not quite the time to begin investing in oil.
The good news though is I believe we are in the seventh or eighth inning of this two year correction, with the floor not too far from here. We should be singing “Take Me Out To The Ballgame” about now.
The other good news is that even though oil’s chart is not all that hot right now, some of the individual oil companies’ charts are beginning to look better the past few weeks, and have an intriguing risk to reward. The key word is some.