Hard Commodity – Adaptiv

Time To Buy Oil

March 4, 2016April 13, 2022

Do you know the best time to buy oil? Or, any asset for that matter? It’s simple, yet we all love to make things more complicated than they need to be. The simple answer is that we should buy an asset when the reward dramatically outweighs the risk. So, when we hunt the best opportunities, we need to be able to identify the risk and reward. Technical analysis allows us to do just that. When we study price (aka technical analysis), we can see the dynamics of supply and demand at work. When we study price, we are studying economic law, not theory. When there is more demand than supply, price goes up. When there is more supply than demand, price goes down. And for the last 18 months, we’ve seen plenty of supply when it comes to the price of one of the world’s favorite commodities: OIL. In that timespan, the price of oil dropped 74%. Anyone recognize that percentage? (HINT: Read yesterday’s research article. Could they be related? Um. Yes.)

Technical analysis showed us that there was no reason to own oil back in early August, 2014. There was too much risk compared to the potential upside reward. Once West Texas Crude ($WTI, $WTIC) broke $96, it was apparent there were more sellers than buyers. Supply was too great. A year and a half later, and things have changed. We are seeing buyers step in at current levels. Let’s take a look.

[click chart to enlarge]

The chart above is a weekly chart of West Texas Crude dating back to 2007. We can see the low in late 2008 / early 2009, where oil found demand (aka buyers) near the $35 level. We can also see where oil broke down in late summer 2014 and dropped precipitously through that important 2008/2009 low. However, the last few weeks have changed the demand/supply dynamic. The price action during this time has been very constructive for this important energy commodity. Buyers have stepped in and price has broken through the year and a half downward trend line. In addition, price is back up to that very important $35 level.

[click chart to enlarge]

Moving in a little bit closer on this weekly chart, we can see that momentum and price have been diverging for over a year. Momentum leads price. When this condition lasts long enough, it can create some pretty powerful price moves once price decides to catch up to momentum. In addition, we can see that if price were to break above the important 2008 / 2009 level, a false breakdown will have taken place. As we wrote yesterday, from false moves come fast moves in the opposite direction. The weight-of-evidence suggest that buyers are back in a big way and it’s highly likely oil will move quickly upward if price can push through the $35 – $37 window.

[click chart to enlarge]

Now that we know upside reward is likely, we need to know when our opinion is wrong (assuming a position is wrong is a great way to remove yourself from bias and opinion). We don’t care about being right. We care about being on the right side of the trade. By identifying previous areas of supply and demand, we can identify a proper exit and practice prudent risk management. Using the daily chart, it’s easy to see the importance of the $33.75 price level. That price defines our risk. If the price of oil is below $33.75, we’re no longer interested.

Keep it simple.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Commodity

Striking Oil

March 22, 2015April 13, 2022

It’s hard to go a day without hearing or reading about the recent collapse in oil prices. And why wouldn’t we? The 60% drop in price over the past nine months is one of the greatest in history. In fact, the entire commodities complex has been hit hard during this time. But really, it should come as no surprise to investors that these price declines have taken place while the U.S. dollar has rapidly increased in value during this timeframe. Make sense, doesn’t it? Those items priced in U.S. dollars will decrease in price as the value of the U.S. dollar increases.

(Source: charliebilello.tumblr.com)

Everything from agricultural and soft commodities to industrial and precious metals have suffered significant price declines as the dollar has rocketed upward. Even though this price correction should not be a surprise, investors have become exceedingly pessimistic towards commodities. Such pessimism in the commodities space has not been this strong since the 2008-2009 financial collapse.

(Source: Shortsideoflong and SentimenTrader)

With such negativity prevalent in this space, we sit up, take notice, and look for opportunities. We think we’ve identified a well defined opportunity in oil, the focus of today’s article. Our oil investment tool of choice is USO, the United States Oil Fund – an ETF that tracks light, sweet crude oil. Looking at the two year chart of oil’s daily price below, we can see its impressive decline. And, we can see that it has developed a nice divergence between price and momentum (as measured by Wilder’s RSI).

Zooming in, we can see the divergence up close and note the potential for a false breakdown if 16.75 is reclaimed. With the amount of investors shorting oil, the aforementioned set-up is ripe for a sharp reversal. If 16.75 can be reclaimed and the downward green trendline broken, price could move rapidly upward towards February’s highs (+19%) and even a 38.2% retracement of this epic collapse, which would be a 45% gain from these levels.

We like USO above 16.75. There is no reason to own it below that level, which lines up with the January lows. Our risk is defined. We don’t care if we own it above 16.75 and quickly turns back down and we get stopped out. Getting stopped out means we did something right – proper risk management. And if it doesn’t breakout above 16.75, no worries. We’ll wait some more. With this opportunity, our risk is well defined and the reward is heavily skewed in our favor. We’ll own it above 16.75. Below that, we’re not interested.

Disclosure: the author will consider a long position in USO based on the criteria provided in the article.

Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions.

Commodity

Silver Linings Playbook

November 1, 2014April 13, 2022

Since April, 2011, Silver has been getting crushed. When I say crushed, I mean it. Down over 65%, this precious/industrial commodity has been a wasteland for those hoping it would increase in price. We don’t fight price. Price is the manifestation of opinion and final arbiter of value. Price knows more than we do. We simply identify opportunities. And Silver, curious investor, may be approaching the best investment opportunity of the next decade. But let’s not get ahead of ourselves. There’s likely more downside to come. Between Thursday and Friday, Silver (represented here by SLV, the Silver ETF), continued its relentless downtrend – down another 7%.

We have some targets identified where a bottom in Silver seems logical. See the chart below (click it to embiggen). At first, it may seem a little confusing, but it’s really quite simple. Price moves to equilibrium. The orange annotations mark two measured moves (from the 2011-2013 broken descending triangle and from the 2013-2014 broken descending triangle). Those two measured moves end up within 10 cents of each other. We don’t get picky. The 13.50 – 14.00 range should provide stiff resistance to any further downside pressure. Assisting this logical turning point, is the downward trendline in green. And to help us in timing any potential bottom are some very accurate cycles (annotated in purple). Focus your eyes on only the cycles, you’ll notice they align with many minor and major turning points. Adding everything up, we are going to be looking for a major low in Silver sometime between now and February, 2015. Our price target is between 13.50 – 14.00. Once we reach that level, we’ll be looking for evidence of a change of direction. If/when that happens, I’ll let you know and share with you why this could a be major opportunity.

Category: Hard Commodity

Time To Buy Oil

Striking Oil

Silver Linings Playbook