Is there a bullish crude oil breakout coming? A few analysts seem to think so.
A little history. Remember early 2016 when crude fell below $35? The media talking heads went perma-bearish saying, “We’ll never see $50 oil again.” Well, it took several months but sure enough, by 2016 year end we hit $60. More recently, around May 21st we hit a three-year high above $72. Now the suddenly bullish talking heads are touting $100 oil by the end of 2018.
As if on cue, things turned again and the price of WTI crude tumbled below $65. Russia and the Saudis were to blame, hinting that they might boost oil production by one million barrels a day, ending a freeze they helped put into place several months ago. Now, the perma-bulls say this is just a dip, prices will soon bounce to new highs on the way to $100. They point to increasing demand that overtook global production last year and is still moving higher. “It’s time to buy, buy, buy.”
The truth is, trying to predict the price of oil beyond a month or even a week is a mug’s game. There are too many players, too many variables and too many geopolitical events that can change direction in a heartbeat.
One method to put the odds in your favour is to use VectorVest’s Market Index Viewer. The S&P/TSX Energy Index, symbol TTEN, is currently comprised of 37 stocks, all of them quite robust, priced from $3 to $50. The stocks are handpicked by the TMX to represent the energy/petroleum sector. A list of all 37 can be found in a WatchList called S&P/TSX Capped Energy Index.
So, what’s the secret to getting in on the right side of the trend?
First, click on the Viewers tab and select Market Index Viewer from the menu at top left. From there, choose the symbol TTEN and right click on it. Choose “View Stock Graph”.
Use VectorVest’s default layout with Price, 40-SMA and RT. You’ll want to add the 8-EMA which we’ll use as an early warning to exit a basket of stocks.
Here’s what to look for on TTEN before you go long:
- Price has closed above the 40-SMA and the moving average is flat or trending up, not down.
- RT is rising for three days or more, hitting higher lows.
That’s your entry.
For your exit, you could use a sensible Stop-Price for each stock. However, another approach is to sell any holdings that are falling or losing momentum when price on TTEN crosses below the 8-EMA with follow-through to the downside the next day.
Let’s test it out. Open the TTEN graph. The most recent entry signal would have been 4/3/18. Price closed below the 8-EMA on May 23, so that’s our exit signal, selling at the open the next day which was a follow-through day. To find the stocks to buy, go the Capped Energy Index WatchList in a folder called, TSX Capped Indices. Change the date to 4/3/2018. We’ll QuickTest the top 5 stocks to 5/23/18, but before we do, one important change. Sort the stocks by P/S ASC, (Price to Sales Ratio). This delivers lower priced stocks compared to their sales. It seems to work consistently well with petroleum stocks. You should see a gain of 29.13%% or 212.83% ARR with four winners, one loser. Keep in mind there would be some slippage selling at the next day’s open, but still a nice gain; almost 5X the TSX 6.28% gain during the same period.
The prior set-up for testing was short-lived, from 12/27/17 to 1/18/18. That QuickTest shows a 10.31% gain or 171.21% ARR, still not too shabby and four winners once again. What about the one before that? The entry was 10/26/17 and exit 11/13/17. A 15.60% gain or 316.61%% ARR when the TSX was basically flat. A final test shows an entry on 9/12/17 and exit on 10/6/17. Five winners for a gain of 9.65% or 146.84% ARR.
The above graph set-up for TTEN works well with all the Market Indices and is a nice complement to the Industry Group and Sector studies presented by Mr. Todd Shaffer in last Friday’s SOTW Special Presentation. Armed with this information, I hope you’re ready for the question: CRUDE OIL: IS IT TIME TO BUY THE DIP?