WTI bulls, caution to you these 3 charts

March – June WTI trend terminated

Did WTI bottom? I don’t know but I am definitely not very keen. This was what I wrote about WTI before and this post on XAUUSD lays out what I think a true reversal should look like. In short a true bullish reversal has to make a new 52-week high which WTI did not and therefore does not qualify.

Whether or not WTI has bottomed, 2 out of 3 charts here indicate that WTI’s March – June 2016 up trend has been terminated and the third chart I interpret WTI did not bottom, has more room to fall.

 

Chart #1 – Year to year decline

WTI weekly chart Nov 2013- present

WTI weekly chart Nov 2013- present

  1. Year to year trend is down with series of lower 52-week highs and 52-week lows.
  2. A true bullish reversal should at least beat last year’s highest print. WTI has not.
  3. In addition, there is no signficant chart pattern associated with bullish reversals – such as the W, VVV or inverted head and shoulder.
  4. Therefore the recent rally is mostly a retracement.
  5. That V-shaped rebound in February is more likely a result of short covering, a lot of investors on the sideline who see WTI oversold and probably a portion who think that WTI will pop like a cork similar to 2009 (due to QE). This was what I wrote in March.

    BUT before you go all in, do note how it is different this time.  Everything looks good from the candlesticks, price point of view until you overlay Dow Jones Industrial Average (and the Fed’s rhetoric) into the picture.

    1. The previous time WTI was this low, stocks were equally cheap but this time there is a huge divergence.
    2. Late November 2008 the Federal Reserve started QE 1 whereas it is supposed to hike rates this time.
    ""

    WTI monthly chart 2008 – present overlaid with Dow Industrial (published 07 March 2016)

 

Chart #2 – Week 28 action terminates the party

WTI daily chart mid-April 2016 - present

WTI daily chart mid-April 2016 – present

  1. That week 28 bearish expansion below June low terminated March – June’s higher-high higher-low sequence. Based on my study, such an expansion usually indicates the end of a previous trend.
  2. Besides month – month price action, week – week has also given a signal. Since week 27, weekly price action has been following a lower to lower sequence.

[ 15 July 2016 - Note I re-read this post again and realised that this chart was labeled wrongly. The weeks are 26, 27 and 28. This week from Monday 11 Jul to Sun 17 June is still Week 28.]

 

Chart #3 – Is CAD going to lead the way?

CADUSD 12M chart overlaid WTI

CADUSD 12M chart overlaid WTI

  1. This is a chart I showed to my IG seminar crowd last month and again today. It is an overlay of CADUSD with WTI. I use CADUSD instead of the usual USDCAD so as to highlight the positive correlation Canadian Dollar has with oil.
  2. It could be coincidence or fact but I find CAD a leading indicator. See the first set of circles on left marking CADUSD and WTI tops in 2007. I interpret this as CAD rising ahead of WTI (see candle high) but ending with a not-too-bullish close for the year. Subsequently it opened and quickly went into red for 2008. During the same period, it appears that WTI brought its bullishness into 2008 (it managed to do a big rally from market open which CAD did the year before).
  3. The second set of circles in 2013 show the same. 2013 marks the start of CAD’s year to year decline to present. WTI managed to put off that decline to 2014.
  4. Now look at the horizontal lines on the right for CAD and WTI. This is the last feature that can have different interpretations. Based on appearance, CAD has fallen deeper while WTI found support – which looks like WTI is relatively stronger. Correct? Maybe there is a little bit of latency here.
    Interpretation A) WTI has found support and therefore basis to rally. CADUSD has room to catch up more.
    Interpretation B) WTI has again pushed off its correction i.e. CAD is showing the true direction as a lead and therefore WTI is about to catch down soon.

    CADUSD weekly chart from October 2014- present

    CADUSD weekly chart from October 2014- present

Is Interpretation B a problem? If you think this is a problem – CADUSD is perched on 4-month low with a descending triangle and resistance on top. This is what Stockcharts.com says about descending triangles.

The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.

""

Descending triangle | Source: Stockcharts.com

A or B? Choose your own poison accordingly.

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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