Technical Analyst Clive Maund shares his view on the current state of the oil market.
Although the last Oil Market update posted on May 3 has been proven wrong, since the giant Head-and-Shoulders top in oil that we observed back then has seemingly aborted, with the price of crude in recent weeks breaking above the Shoulders of the suspected H&S top, the pattern may continue to have bearish implications because if the broad market drops like a rock soon, as is looking increasingly likely, then oil and the oil sector will turn tail and plunge too, which means that the rally of recent weeks may turn out to be a sucker rally or “head fake.”
We’ll start by looking at the 4-year chart for Light Crude because this enables us to see this seemingly aborted H&S top to advantage, the rally of recent weeks having risen above the highs of the Shoulders of the pattern. The pattern still looks overall bearish, so this rally is anomalous. On the face of it, having broken above the resistance at the Shoulders of the H&S and with its Accumulation line strong (not always reliable) and momentum trending higher, oil looks set fair to continue advancing, but it looks a lot different if we factor in that the broad stockmarket may soon plunge as part of a pan selloff that takes most everything down.
As we know, low oil prices benefit the common man and business generally since many products use oil, and low oil prices mean lower transportation costs. However, the powerful elite transnational cartels that control oil do not want low oil prices — they want high oil prices because that means bigger profits for them. There isn’t much they can do about the demand side of the equation, which is relatively constant, apart, of course, from major economic depressions that drastically reduce demand for oil and thus the price, but they can and do manipulate the supply side of the equation on a grand scale.
This is a reason why one of the first things that the Biden administration did was attack the U.S. oil industry, which was vibrant and producing a surplus by the end of the Trump presidency, by closing down pipelines and curbing exploration, etc., another reason being to make electric vehicles more attractive. They also, when it suits them, use cruder methods to support the oil price, such as setting fire to oil refineries and blowing up oil tankers, etc. We have seen a lot of this going on in the recent past, and even though they have succeeded in jacking up the oil price in recent weeks, it will be to no avail if the stock market crashes soon as part of a pan-selloff.
You will remember what happened to oil in the Spring of 2020. For a while, you couldn’t give it away. Now, we have another crash in the prospect that will be triggered by a tidal wave of bank failures and possibly new lockdowns in pursuit of the WEF’s Agenda 2030. The point is that although oil has succeeded in aborting the H&S top that we had earlier observed and is seemingly on its way higher, it could soon have the rug pulled from under it by a market crash.
Moving on, we see on the 6-month chart for Light Crude that although oil remains in a quite strong uptrend that began early in July with a bullish moving average cross having occurred, it is now overbought and appears to be spluttering at a provisional inner trendline that if valid will turn the uptrend into a bearish Rising Wedge, putting it at risk of suddenly turning lower and dropping hard to break down from the uptrend, which would quickly lead in the event of a broad market meltdown to a brutal plunge.
Now, we’ll look at the 20-year chart for Light Crude to get a big-picture perspective. Here, we see that oil’s recent advance followed its dropping back last year and early this year to a zone of quite strong support.
We can also see that oil is still way below its all-time highs achieved way back in 2008, and if we factor in inflation since then, it is even further below those highs in real terms.
Now, we’ll look at oil stocks by means of charts for the XOI oil index, using the same timeframes as the oil charts to enable direct comparison.
Beginning again with a 4-year chart for the XOI oil index, we see that oil stocks began a powerful uptrend late in 2020 that resulted in this index more than tripling in price, which is certainly very impressive. However, the index started to break down from this uptrend in the Spring, and despite the rally of recent weeks having taken it to new highs, it is suspected that a large rounding top pattern is forming, mindful that the broad stockmarket may soon tank, oil stocks could be at their final high here.
An important point worth observing on this chart is that, despite oil itself having fallen back hard from its mid-2022 highs above $120 to about $70 in the Spring of this year, oil stocks remained buoyant during this period, only dropping back relatively modestly, but as mentioned above it now looks like a top area is forming.
Turning to the 6-month chart for the oil index, we can see the quite steep uptrend that began in July in detail.
Superficially, it looks like there is “no stopping it” with the uptrend very much in force and a bullish cross of the moving averages having occurred, but on closer inspection, we can also see that the latest upleg has not — yet, at least — been confirmed by momentum and also that the choppy action of recent days suggests that it might be topping out short-term here, which will mean that the uptrend is converging, making it a bearish Rising Wedge.
If so, and it breaks down below its lower boundary, as could happen if the broad market crashes or drops hard, then a severe decline would be in prospect.
When we zoom out and look at the long-term 20-year chart for the XOI index, we can at once see why it might be at the final top right now, for it has arrived at a major trendline target at a long-term cyclical high.
Everyone is raving bullish on the oil sector now, which is exactly what you would expect at the top, meaning that this might be the perfect place to defy the crowd and short it. As the old British SAS motto says, “Who dares wins,” which we will only qualify by adding “or dies trying.”
Originally posted at Clivemaund.com at 11.00 am EDT on September 17, 2023
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Clivemaund.com Disclosures
The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maund’s opinions are his own, and are not a recommendation or an offer to buy or sell securities. Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. Although a qualified and experienced stock market analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr. Maund’s opinions on the market and stocks can only be construed as a solicitation to buy and sell securities when they are subject to the prior approval and endorsement of a Registered Securities Advisor operating in accordance with the appropriate regulations in your area of jurisdiction.
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