Is the bottom in for energies?

January 15, 2015 10:23 AM

This would seem to be the big issue on everyone’s mind looking forward: whether you are directly affected by the price of crude or a trader looking for opportunities in the market, the falling knife that has been the energy complex pricing has been difficult to catch without cutting oneself.

The API (American Petroleum Institute) and EIA (U.S. Energy Information Administration) released its supply and demand data that did show a continuing build in crude supplies as well as the refined products, though gasoline did not build as much as some analysts had thought. Greater supply coupled with the possibility of lesser demand based on the global concerns and softer U.S. data would seem to indicate that prices could continue lower. However, that has not been the case, at least immediately as West Texas Intermediate crude is currently higher on the day, though modestly so.

As the economic sting of lower energy prices hits the energy specific companies throughout the world, the recent retail sales data would seem to suggest that the break at the pump to consumers is not being re-invested in consumer spending, though it may take some more time for that affect to manifest itself in the data. Interestingly we have seen a nearly daily coupling and then de-coupling in the price of crude and the equity index prices.  Some stating that crude oil has been dragging the equities down or vice versa at times.

However, we have seen an equal amount of times that these prices have been moving in opposite directions without any commodity specific new information driving that diversion. This lack of correlation should serve as a warning to getting to wed to the idea of trading one market directionally based on another markets price action where a correlation is so tentative as this one.

Fundamentally, as illustrated above, the energy picture remains cloudy at best. Technically, the analysis of price action, it is difficult to draw a crisp picture as well, though something may be coming into focus on the near horizon. The trend is obviously down as the orange trend line would suggest. From a technical standpoint, a third test of the barrier to the upside without a violation would probably indicate another leg lower.

However, should that trend line resistance be violated, then it is probable that the price discovery would attempt to find higher values (notice the correlation between the trend line in orange and the 49 day moving average in blue; this could prove to make this location even more likely to be tested). A close above the short term pivot of 46.82 would most likely produce a run at that important level. Building this type of ‘break out pennant’ can take some more time but usually does produce a rather expansive move in the price discovery (see the previous pennant in light blue that, once violated, did lead to another $10 move to the downside). 

About the Author

Tory Enerson is a senior market strategist with the Zaner Group in Chicago, an Independent Introducing Broker. He has been in the futures industry for over 20 years. Beginning his career at the CBOT in 1990, Enerson worked his way up through the industry when he became a member of the CBOT in 1998 and traded for over a decade before beginning to work with clients as a market strategist.