Crude Oil Bulls Struggle to Show They Have The Advantage

Crude oil closed higher due to short covering on Thursday as it consolidated some of Tuesday's decline. The high range close sets the stage for a steady to higher opening on Friday.

Stochastics and the RSI remain bearish signaling that a short term top might be in or is near. Closes below Wednesday's crossing at 104.35 are needed to confirm that a short term top has been posted. If April renews this winter's rally, the 2011 high crossing at 114.09 is the next upside target.

First resistance is last Thursday's high crossing at 110.55. Second resistance is the 2011 high crossing at 114.09. First support is Wednesday's low crossing at 104.35. Second support is the reaction low crossing at 97.73.

Check out our latest Video, Market Analysis and Forecast for the Dollar, Crude Oil, Gold, Silver, and the SP500

U.S. Petroleum Product Exports Exceeded Imports in 2011 For First Time in Over Six Decades

Source: U.S. Energy Information Administration, Petroleum Supply Monthly.
Notes: Net exports equal gross exports minus gross imports. Negative net export values indicate net imports.

The United States in 2011 exported more petroleum products, on an annual basis, than it imported for the first time since 1949, but American refiners still imported large, although declining, amounts of crude oil, according to full-year trade data from EIA's Petroleum Supply Monthly February report. The increase in foreign purchases of distillate fuel contributed the most to the United States becoming a net exporter of petroleum products.

U.S. petroleum product net exports (exports minus imports) averaged 0.44 million barrels per day (bbl/d) in 2011, with imports at a nine-year low of close to 2.4 million bbl/d and exports at a record high of nearly 2.9 million bbl/d. The gap between exports and imports widened the most during the second half of the year from August through December (see charts below), with total monthly exports topping 3 million bbl/d for the first time.

Source: U.S. Energy Information Administration, Petroleum Supply Monthly.

Strong global demand helped propel distillate exports, as distillate fuel, which includes diesel, had a higher profit margin for U.S. refiners than gasoline. Refiners also had access to increased supplies of crude oil imports from Canada, which in 2011 topped 2 million bbl/d for the first time, and from North Dakota's Bakken formation to process into petroleum products.

The United States remained a net importer of crude oil, some of which was refined into petroleum products that were then exported. Petroleum products were ranked second in value of all U.S. exports during 2011 at $111.1 billion, up 60% from 2010, according to U.S. Department of Commerce trade data. Vehicles were the number one U.S. export last year at $132.5 billion. Crude oil was the biggest U.S. import, valued at $331.6 billion, up 32% from 2010. Rising crude oil prices, rather than higher crude oil import volumes, were the key driver of the increased value of crude oil imports.

Check out our latest Video, Market Analysis and Forecast for the Dollar, Crude Oil, Gold, Silver, and the SP500

Disappointing Day For Crude Oil Bulls

It was a disappointing day for the bulls in crude oil, as this market pulled back to an area where it should begin to find support around the $105 level We continue to favor the long side of this market and expect it will improve into early April.

We are looking for crude oil to make its highs probably somewhere in the April May period. With a Trade Triangle score of +55, we believe this market is regrouping to move higher later in the month. We expect to see further gains in crude oil. All traders should be long this market with appropriate money management stops.

Crude oil [April contract] closed down $1.88 a barrel at $104.84 today. Prices closed nearer the session low today and hit a fresh two week low. The market was pressured by a stronger U.S. dollar index today. Crude oil bulls still have the overall near term technical advantage but did fade today.

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The U.S. Dollar and Crude Oil Hold Clues About The Future

The past few months have been a difficult environment for anyone that was bearish. The next few months may prove to be difficult for everyone regardless of directional bias.

We live in a world where headlines can move the market in split seconds as high-frequency trading robots cause flash rally’s and flash crashes regularly.

As an example, the price action in the Market Vectors Short Muni Index (SMB) on February 28^th demonstrates the impact that these high frequency traders have on illiquid underlying assets.

We certainly hope there were not any absent minded retail investors that got caught using market orders during the flash rally only to recognize losses as great as 5% or more in a matter of minutes.

The following chart illustrates a flash rally and the monster 40% plus rally witnessed in less than 1 minute. Can someone say fat finger mistake?

Market Vectors Short Muni Index 1-Minute Chart

In addition to high frequency trading, we have to constantly monitor the headlines coming out of Europe as one event or official statement has the potential to cause the Euro to rally or selloff almost instantly whether the information is fact or fiction.

We have traded small for the most part during the beginning of 2012 as market conditions have been volatile even if the volatility index (VIX) has not necessarily supported that view.

One after another, perma-bears have capitulated to the bullish camp and now we have pundits calling for the Dow Jones Industrial Average to move over 15,000 by the end of the year.

We both use strategies which in many cases would be considered contrarian by nature. Admittedly we will not get every move in the market correct, but what we will do is layout key areas that price action should migrate to in the form of key price levels across short, intermediate, and long term time frames.

Our objective is to provide readers and our members with actionable information which can be viewed objectively by both bulls and bears alike. With that said, the following viewpoint we have of the marketplace today runs contrary to the collective group of market pundits.

While most market pundits expect higher prices and stronger economic data, there is reason to believe that recent developments could be indicating that volatility may lurk ahead. Volatility could rise up and push equity valuations lower in the near term.

The daily chart of the Ipath S&P 500 VIX Short-Term Futures ETF (VXX) shown below illustrates that the VXX has seen strong volume in the past few weeks. Additionally the VXX appears to be trying to form a bottom.

With volatility at these levels, put protection is cheap and it would appear based on volume that the smart money is getting long volatility. Long VXX trades are designed to either act as a portfolio hedge or as a potential profit mechanism should a correction play out.

Ipath S&P 500 VIX Short-Term Futures (VXX) Daily Chart

By now most readers are aware of the rally that has been taking place in oil futures for the past few weeks. Nancy Pelosi came out with a statement blaming those evil speculators again while Republican Presidential hopefuls used higher oil prices as another key political topic against the current administration.

Just when the noise was starting to rise to a roar, the marketplace was quieted by a rally in the U.S. Dollar on February 29^th. The daily chart of the Dollar Index futures is shown below.

Dollar Index Futures Daily Chart

Do readers find it rather odd that just about the time when oil was on the lips of every media personality in the United States that the Federal Reserve issues a reverse-repo to pull in liquidity? Do you find it at all coincidental or could it be that Mr. Bernanke was told to slow down the rally in oil prices?

After the reverse-repo was performed, the Dollar soared higher and was showing continuation to the upside on Friday afternoon during intraday trade. The Dollar is potentially forming a bottom presently and the fact that the Federal Reserve is aiding in that formation presents additional risk for downside in the S&P 500 Index and precious metals in the near term.

For the past several weeks the U.S. Dollar Index has pulled back and the S&P 500 definitely took notice. However, the Dollar is on the verge of carving out a weekly swing low which could have legs to much higher prices.

While many pundits routinely mock the Dollar and trash it, in the event of a major currency or credit event in Europe the Dollar will be one of the key safe havens that large sums of wealth will migrate too.

If the Dollar Index Futures can push through the downtrend line illustrated on the chart above with strong supporting volume a much larger move higher will likely play out. Should that scenario play out, the S&P 500 Index will likely begin to rollover.

It should be noted that the S&P 500 has struggled on multiple occasions to break above the key 2011 highs. The S&P 500 Index daily chart below demonstrates the resistance directly above current price action.

S&P 500 Index Daily Chart

We have been bearish on the S&P 500 since price was testing the 1,330 price level. After the subsequent breakout we targeted the key 2011 highs as a last stand for the bears. If the Dollar finds a bottom and rallies sharply higher from current levels a correction in the S&P 500 will likely play out.

The other possibility would be a breakout over current resistance levels which would likely see the S&P 500 move to the 1,400 level if not higher in a matter of a few weeks. We are not leaning in either direction in terms of price action currently, but we are expecting the VIX to move higher in coming weeks and months ahead.

In our most recent collaborative missive, we discussed the fundamental case for gold prices going higher over the long term. Cleary the price action this week (specifically the price action on Wednesday February 29^th) has been bearish and we expect to see prices chop around with a potentially bearish view for the next few months.

Gold Futures Daily Chart

While gold has pulled back sharply, the likely move lower in coming weeks and months ahead will offer a strong buying opportunity for investors that are patient. If the Dollar breaks out to the upside which we anticipate, gold should move down into a significant low.

Should this scenario play out an entry point near the low will likely offer strong upside potential. In fact, it might be the last deep low before a prolonged period of choppy price action until the Dollar tops.

We firmly believe that as long as central banks continue to print money with wreckless abandon, the fundamental case for gold remains quite strong in the longer term.

We have received a lot of emails recently asking about our opinions on the future price action in oil. Even though the Dollar may breakout to the upside, oil has a risk premium built into the price already for potential geopolitical conflict. However, military action in the Middle East could easily push prices higher.

Should oil push higher and test the 2011 highs and breakout to the upside, the likely results will be a weakening in the domestic economy as gasoline and diesel prices would surge higher. A surge in oil prices has a direct implication to the domestic U.S. economy as the cost for nearly everything will rise. 

The daily chart of oil futures is shown below.

Oil Futures Daily Chart

Conclusion for what to expect next:

Ultimately we believe the two most critical assets to monitor at this time are the U.S. Dollar and oil futures. The U.S. domestic economy cannot handle significantly higher oil prices from the current levels without seeing business growth slow. Furthermore, if the Dollar rallies it could put pressure on the equity markets as well.

While the equity markets and the economy are not the same thing, it is important to note that higher oil prices at a certain point will become equity negative.

The VIX is sending a warning that market participants are too complacent and the Dollar is potentially forming a rounded out bottom. These two conditions paired with geopolitical risk in the Middle East represent additional risks to economic growth.

Furthermore, market participants cannot become complacent regarding the potential risk that Europe still poses. With the various risks listed above in mind, we are keeping position sizes small and are attempting to remain Delta neutral in our portfolios. Risk is beginning to elevate to extremes.

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Volatility Bounces Bottom Awaiting Bad News or Selling to Strike!

Over the past 5 months we have seen volatility steadily decline as stocks and commodities rise in value. The 65% drop in the volatility index is now trading at a level which has triggered many selloffs in the stock market over the years as investors become more and more comfortable and greedy with rising stock prices.

Looking at the market from a HERD mentality and seeing everyone run to buy more stocks for their portfolio has me on edge. We could see a strong wave of fear/selling hit the S&P 500 Index over the next two weeks catching the masses with their hand in the cookie jar ........ again.

If you don’t know what the volatility index (VIX) is, then think of it as the fear index. It tells us how fearful/uncertain investors are or how complacent they are with rising stock prices. Additionally a rising VIX also demonstrates how certain the herd is that higher prices should continue.

The chart below shows this fear index on top with the SP500 index below and the correlation between the two underlying assets. Just remember the phrase “When the VIX is low it’s time to GO, When the VIX is high it’s time to BUY”.

Additionally the Volatility Index prices in fear for the next 30 days so do not be looking at this for big picture analysis. Fear happens very quickly and turns on a dime so it should only be used for short term trading, generally 3-15 days.

Volatility Index and SP500 Correlation & Forecast Daily Chart:

Global Issues Continue To Grow But What Will Spark Global Fear?

Everyone has to admit the stock market has been on fire since the October lows of last year with the S&P 500 Index trading up over 26%. It has been a great run, but is it about to end? Where should investors focus on putting their money? Dividend stocks, bonds, gold, or just sit in cash for the time being?

I may be able to help you figure that out.

Below is a chart of the Volatility index and the gold exchange traded fund which tracks the price of gold bullion. Notice how when fear is just starting to ramp up gold tends to be a neutral or a little weak but not long after investors start selling their shares of securities we see money flow into the shiny yellow safe haven.

Gold & Fear Go Hand In Hand: Daily Chart

Looking at the relationship between investor fear/uncertainty and gold you will notice scared money has a tendency to move out of stocks and into safe havens.

Trading Conclusion Looking Forward 3 months…

In short, I feel the financial markets overall (stocks, commodities, and currencies) are going to start seeing a rise in volatility meaning larger daily swings which inherently increased overall downside risk to portfolios and all open positions.

To give you a really basic example of how risk increases, look at the daily potential risk the SP500 can have during different VIX price levels:

Volatility index under 20.00 Low Risk: Expect up to 1% price gaps at 9:30am ET, and up to 5% corrections from a previous high.

Volatility index between 20 – 30 Medium Risk: Expect up to 2% price gaps at 9:30am ET, and up to 15% corrections from recent market tops or bottoms.

Volatility index over 30 High Risk: Expect 3+% price gaps at 9:30am ET, and possibly another 5-15% correction from the previous VIX reading at Medium Risk

Note on price gaps: If you don’t know what I am talking about a price gap is simply the difference between the previous day’s close at 4:00pm ET and the opening price at 9:30am ET.

To continue on my market outlook, I feel the stock market will trade sideways or possibly grind higher for the next 1-2 weeks, during this time volatility should trade flat or slightly higher because it is already trading at a historically low level. It is just a matter of time before some bad news hits the market or sellers start to apply pressure and either of these will send the fear index higher.

I hope you found this info useful and if you would like to get these reports free every week delivered to your inbox be sure to visit here to join my FREE NEWSLETTER!

Chris Vermeulen

ONG: Crude Oil Weekly Technical Outlook For Saturday March 3rd

Crude oil attempted to extend recent rally last week and hit as high as 110.55. But upside was limited there on steep loss in momentum. A short term top is likely formed. Initial bias is neutral this week for some consolidations. At this point, we'd expect downside of the consolidation to be contained by 38.2% retracement of 95.44 to 110.55 at 104.78 and bring rally resumption. Above 110.55 will target a test on 114.83 key resistance next.

In the bigger picture, the medium term up trend from 33.2 shouldn't be completed yet. Rise from 74.95 is indeed tentatively treated as resumption of such rally. Sustained break of 114.83 will target 61.8% projection of 33.2 to 114.83 from 74.95 at 125.40. On the downside, though, break of 95.44 support will indicate that correction pattern from 114.83 is going to extend further with another falling leg to 74.95 and below before completion.

In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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Was There an Explosion or Not?

Commodity traders rode a see saw session as markets spiked on news of an oil pipeline explosion in Saudi Arabia. Only to trader lower as Saudi officials deny that any event took place at all.

Still, crude oil closed higher on Thursday extending the rebound off Tuesday's low. The high range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are turning neutral to bullish signaling that sideways to higher prices are possible near term.

If April extends this winter's rally, the 2011 high crossing at 114.09 is the next upside target. Closes below the 20 day moving average crossing at 103.09 would confirm that a short term top has been posted.

First resistance is last Friday's high crossing at 109.95. Second resistance is the 2011 high crossing at 114.09. First support is the 10 day moving average crossing at 106.78. Second support is the 20 day moving average crossing at 103.09.

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Crude Oil and Product Markets Over the Past Two Months

On February 29, 2012, EIA released The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran, a 60 day recurring report required under Section 1245(d)(4)(A) of Public Law 112-81, the National Defense Authorization Act for Fiscal Year 2012. The Act requires that, not later than 60 days from enactment and every 60 days thereafter, the "Energy Information Administration, in consultation with the Secretary of the Treasury, the Secretary of State, and the Director of National Intelligence, shall submit to Congress a report on the availability and price of petroleum and petroleum products produced in countries other than Iran in the 60 day period preceding the submission of the report."
EIA estimates that the world oil market has become increasingly tight over the first two months of this year.

Source: U.S. Energy Information Administration, based on Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE), and Dubai Mercantile Exchange (DME).  Note: Prices represent rolling 5-day averages. 

Oil prices have risen since the beginning of the year and are currently at a high level. Global liquid fuels consumption is at historically high levels. While the economic outlook, especially in Europe, remains uncertain, continued growth is expected. Unusually cold weather in Europe contributed to tighter markets by increasing the demand for heating oil, particularly during February.

With respect to supply, the world has experienced a number of supply interruptions in the last two months, including production drops in South Sudan, Syria, Yemen, and the North Sea. Both the United States and the European Union (EU) have acted to tighten sanctions against Iran, including measures with both immediate and future effective dates.

Finally, spare crude oil production capacity, while estimated to be higher than during the 2003 to 2008 period, is quite modest by historical standards, especially when measured as a percentage of global oil production and considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran.

Crude oil prices have been generally rising over the past two months, particularly in recent weeks. This is reflected in price movements on the most commonly traded oil futures contracts. Comparing the 5 day periods ending December 30, 2011 and February 27, 2012, the price of the front month of the New York Mercantile Exchange (NYMEX) light sweet crude oil contract (WTI) rose from $99.77 per barrel to $107.66 per barrel. The Brent front month price, which is widely viewed as being more representative of global prices for light sweet crude oil, rose from $108.04 per barrel to $123.56 per barrel over the same period.

Gasoline prices have also generally been rising over the past two months, particularly in recent weeks. Reformulated blendstock for oxygenate blending (RBOB) is often traded instead of finished motor gasoline that already has been blended with ethanol, since oxygenate blending typically takes place at terminals along the distribution chain.

Comparing the 5-day periods ending December 30, 2011 and February 27, 2012, the price of the front month of the NYMEX RBOB contract, which calls for delivery in New York Harbor, rose from $2.68 per gallon to $3.11 per gallon. RBOB prices reflect pricing at the wholesale-level that do not include motor fuel taxes, or costs and profits associated with the distribution and retailing of gasoline. However, increases in RBOB prices are typically reflected in higher pump prices.

Source: U.S. Energy Information Administration, based on Chicago Mercantile Exchange (CME). 

Notes: Prices represent rolling 5 day averages. Reformulated blendstock for oxygenate blending (RBOB) is often traded instead of finished motor gasoline that already has been blended with ethanol, since oxygenate blending typically takes place at terminals along the distribution chain.

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Let's Take a Look at Why Gold and Silver Collapsed

Did our Trade Triangle Technology get it right on these two metals?

With a Score of -60 on gold this market remains in a trading range. We would not rule out a pullback in gold to the $1,650 level. With our long term monthly Trade Triangle still in a negative red mode, we cannot get 100% excited about this market at the moment. We are not super bearish on this metal, we just need further confirmation with the tools we know are successful in trading gold. Long term term traders should be in short positions in gold with appropriate money management stops.

Gold closed sharply lower on Wednesday [April contract] and below the 20 day moving average crossing at 1745.50 confirming that a short term top has been posted. The low range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are diverging and turning bearish signaling that sideways to lower prices are possible near term.

If April renews the rally off December's low, the 75% retracement level of the September-December decline crossing at 1825.20 is the next upside target. First resistance is Tuesday's high crossing at 1792.70. Second resistance is the 75% retracement level of the September-December decline crossing at 1825.20. First support is today's low crossing at 1704.50. Second support is the reaction low crossing at 1652.20.

A possible outside negative engulfing line for silver today, which is surprising given the market action yesterday. We want to be patient and wait to see if this actually happens on Thursday and Friday. Our long term monthly Trade Triangle remains positive on silver. This particular indicator has done extremely well in the past. Long and intermediate term traders should be holding long positions in silver with appropriate money management stops.

Silver posted a key reversal down [May contract for silver] on Wednesday as it consolidates some of the rally off December's low. The low range close set the stage for a steady to lower opening on Thursday. Stochastics and the RSI are overbought and are turning neutral to bearish signaling that sideways to lower prices are possible near term. Closes below the 20 day moving average crossing at 34.306 would confirm that a short term top has been posted.

If May extends the rally off December's low, the 75% retracement level of the August-December decline crossing at 39.521 is the next upside target. First resistance is today's high crossing at 37.580. Second resistance is the 75% retracement level of the August-December decline crossing at 39.521. First support is the 20 day moving average crossing at 34.306. Second support is the reaction low crossing at 32.715.

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Why Has Crude Oil Stalled?

Let's take look at crude oil with a critical eye and find out why this market has stalled.

The crude oil market is now getting into an oversold condition, which may be setting the stage for a perfect buying opportunity. We remain positive on this market. We are expecting oil to regroup over the $105 level and generate enough energy to push it to new highs over the $110 area. We are looking for crude oil to make its highs probably somewhere in the May period.

With a Score of +75, this market is in an emerging trend to the upside. We remain longer term positive on this market. With our monthly and weekly Trade Triangles in a positive mode, we expect we will see further gains in crude oil. All traders should be long this market with appropriate money management stops.

Crude oil closed higher on Wednesday ending a two day correction off last week's high. The high range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are overbought and are turning bearish hinting that a short term top might be in or is near. Closes below the 20 day moving average crossing at 102.52 would confirm that a short term top has been posted.

If April extends this winter's rally, the 2011 high crossing at 114.09 is the next upside target. First resistance is last Friday's high crossing at 109.95. Second resistance is the 2011 high crossing at 114.09. First support is the 10 day moving average crossing at 106.05. Second support is the 20 day moving average crossing at 102.52.

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