Chart Watchers Transfixed as Oil Trend Lines Die One bMichael P. Regan
Unless you’re a Philadelphia 76ers fan, there’s probably nothing more frustrating these days than trying to pick a chart line that will show the potential bottom prices for oil and energy companies.
Take, for example, a popular and often reliable charting tool known as the relative strength index. A reading below 30 is considered a buy signal in the 14-day RSI, which measures price momentum by comparing the size of recent gains to losses. New York-traded Oil’s RSI is currently in its 9th day below 30 and capped a 10-day stretch below the threshold in October. Before that, it hadn’t stayed below the level for more than three days since 2012.
Of the 195 energy companies in the Russell 3000 Index, about 90 of them are trading below a 14-day RSI of 30. The index itself has spent four of the last five days below 30 and was under the level for 13 days in October. The energy-stocks index is down more than 29 percent from its peak in June.
“I keep drawing trendlines on my charts that I believe will help boost prices but, so far, they have easily given way to the selling pressure each and every time,” Jeffrey Saut, chief investment strategist at Raymond James, wrote in a note to clients today. The charts highlight “one of the limitations of technical analysis that makes it more of an art than an exact science -- when sentiment gets too strong, panic or euphoria trumps support or resistance.”
Thomas Lee of FundStrat Global Advisors isn’t ready to abandon the charts just yet. He looked at a monthly chart showing that Brent crude’s RSI has dropped to 23 for only the fourth time in 26 years. Following the previous occurrences, oil was higher 100 percent of the time after three months, six months and 12 months, he wrote in a note to clients today, with an average gain of 74 percent a year later.
The best stocks to own after oil reaches such an oversold level are technology and consumer discretionary companies, which outperformed 100 percent of the time, according to Lee. Energy shares were only higher three months later 33 percent of the time.
Of course, Lee’s analysis is only based on three prior occurrences, which is not a lot of data to stand on.
From behind his wall of monitors, William Maloney of Bloomberg First Word has a few more charts to check out. One is the 200-month moving average for West Texas Intermediate crude, a trend line below which the commodity rarely drops very far. It’s currently resting at $60.29 a barrel.
Another is a Fibonacci retracement level, which is named after an Italian mathematician from the Middle Ages who undoubtedly would get a kick out of all this. The number Maloney circled on the chart is $59.87. That price marks a level that represents all but 23.6 percent of the loss in crude from its high above $145 in 2008 to its low of less than $34 in 2009.
Crude is trading below both of those levels today, and Maloney said he’d watch out for further big losses if it ends below those levels repeatedly, especially on a weekly or monthly basis.
“If it closes below those levels, then all bets are off,” he said.
Sort of like any bets on the 76ers making the playoffs.