Energy investors are desperate for some good news. Even as the broader U.S. market has ignored geopolitical risk and political chaos to keep marching upwards, energy stocks have been quietly collapsing. I would love to tell you that that is about to change and that the sector represents a rare value in an overbought market, but neither technical nor fundamental analysis suggest that.
I have said many times before in these pages that technical analysis has its limits. An analysis of a chart can tell you a lot about what has happened, but using it to forecast what will happen is fraught with danger. There is no logical reason why, just because a market followed a pattern in the past, even on many occasions, it will do so in the future. That said, charts are one of traders' few tools, and are useful for illustrating trends and identifying levels that others see as significant. They cannot be ignored, but it is important to understand their limitations.
Fundamental analysis also has its limits. Even on the rare occasions when the various factors that influence supply and demand all point in the same direction at the same time and can only be interpreted in one way there is no guarantee that the market will do the logical thing. The old trader's saying that the market can remain illogical longer than you can remain solvent exists for a reason.
When an obvious technical analysis and an obvious fundamental analysis both suggest the same thing, you can also be wrong…
Energy investors are desperate for some good news. Even as the broader U.S. market has ignored geopolitical risk and political chaos to keep marching upwards, energy stocks have been quietly collapsing. I would love to tell you that that is about to change and that the sector represents a rare value in an overbought market, but neither technical nor fundamental analysis suggest that.
I have said many times before in these pages that technical analysis has its limits. An analysis of a chart can tell you a lot about what has happened, but using it to forecast what will happen is fraught with danger. There is no logical reason why, just because a market followed a pattern in the past, even on many occasions, it will do so in the future. That said, charts are one of traders' few tools, and are useful for illustrating trends and identifying levels that others see as significant. They cannot be ignored, but it is important to understand their limitations.
Fundamental analysis also has its limits. Even on the rare occasions when the various factors that influence supply and demand all point in the same direction at the same time and can only be interpreted in one way there is no guarantee that the market will do the logical thing. The old trader's saying that the market can remain illogical longer than you can remain solvent exists for a reason.
When an obvious technical analysis and an obvious fundamental analysis both suggest the same thing, you can also be wrong of course. There is, however, far more chance of being right in that situation than if the two contradict or are open to completely different interpretations. That is the case now with WTI which is in a well-defined, bearish chart pattern and is being primarily influenced by one technical factor that also suggests lower prices in the future, and maintaining a short bias for oil and oil stocks is likely to continue to be a winning strategy.
(Click to enlarge)
The long term bullish pattern in oil becomes obvious when you draw a couple of lines on a one-year oil futures chart as I have above. That is the definition of a downward channel, and as we have just once again backed off from its top another move down into at least the low forties looks the most likely next move. Even a more immediate analysis shows you just how negative the sentiment surrounding oil is right now. A hurricane is expected to hit the Texas coast tonight, an event that would usually force prices up, just in case of a major disaster, yet WTI is trading lower again this morning.
The long-term down trend that underlies that is almost certainly a result of the market's focus on one basic, fundamental factor. North American oil production, particularly from shale fields, continues to increase. OPEC may agree to cut their production and global growth may show signs of strengthening, but it seems that each positive is met by a wave of new rigs in North America and oil falls back again after every rally. The Trump administration's pro- fossil fuel agenda is not helping either. Removing regulations and issuing more permits both have the effect of encouraging even more rigs and reducing lifting costs.
Little wonder then that even as there are indications that the demand boost that was needed to take care of the existing global glut of crude, oil prices continue a pattern of lower highs and lower lows. There has been volatility within that pattern, for sure, which has been of enormous benefit to those that trade oil and related products, but when the year to date chart for Exxon Mobil (XOM) looks like this…
(Click to enlarge)
…you know long-term stock investors are suffering.
As I said, I wish I could see an end to that situation soon, but when technical factors, fundamental factors and market sentiment all suggest lower oil prices that isn't possible. The best advice I can give to investors in that situation is to become more active in position management. There will be some rallies in individual stocks where profit can be made, but taking those profits before the drop back occurs is essential. At some point, the increases in demand will catch up with the increases in supply and we will head higher again in a meaningful way, but every indication is that we aren't close to that point yet, and there is no relief in sight for energy stock investors.
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