Seasonally speaking, crude oil tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market can also price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to peak out, as the driving and hurricane seasons begin to wind down. Crude oil’s seasonal decline is highlighted in yellow in the above chart.

Based upon crude oil prices (near-term contract) since 1984, November is the worst performing month, down 21 times in 33 years with an average loss of 2.9%. October is nearly just as bad, down 20 times with an average decline of 2.4%. December and January are also losers on average, both down 16 times. These four consecutive months are crude oil’s “Worst Months.” The decline in price is usually the result of a decline in demand as the summer driving season has ended and a decline in demand from refineries that have already build up inventories of heating oil in preparation for winter.

Seasonally speaking, crude oil tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market can also price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to peak out, as the driving and hurricane seasons begin to wind down. Crude oil’s seasonal decline is highlighted in yellow in the above chart.

Shorting the February crude oil futures contract in mid-September and holding until on or about December 10 has produced 22 winning trades in the last 34 years. This gives the trade a 64.7% success rate and theoretical total gains of $101,920 per futures contract. Following three consecutive years of losses, this trade has been successful in four of the last five years.

Today I sold my losing position in SPDR Energy (XLE). And I felt great relief after. I had been looking for a “good” opportunity to close out my XLE position and finally just pulled the trigger today. So I figured I would use this as a self-teaching moment and reminder for all of us of that the real key to successful financial market trading and investing is: Sell your losers short and let your winners ride!

When folks ask me for one piece of trading or investing advice, I don’t wax existential on the merits of seasonality, behavioral finance, technical analysis or old-school fundamentals. I tell them the most important bit of wisdom I have picked up in my short 51-year existence is to go against human emotion, admit error and sell your losers. The flipside is to respect your accuracy and resist being greedy by taking quick profits.

We have generated the greatest gains and outperformance in our track record by letting winners ride. Of course we take some profits along the way by selling-half-on-a-double, using trailing stops, and other sound exit strategies; but our long term outperformance has been generated by letting our winners ride. They were all good stocks with solid fundamentals, strong technicals, picked up at the right time of the year.

That brings us to the matter at hand: Crude Oil. The downtrend this year has been a big story, capped off by today’s big drop. Seasonally, the past six months has been an historically bullish period for crude and the stocks of the companies in the sector, but not so much this year. When markets don’t perform well it is an indication that there are other forces at play that are trumping seasonality and when the seasonality ends those forces may have their say.

We have been in XLE since the seasonal bullish period for oil stocks began in December ahead of the bullish season for crude oil. As you can see from the chart below crude oil has seriously bucked the seasonal trend this year alone with the stocks as represented by the XLE following suit.

Much has been made recently of the death cross in April when crude’s 50-day moving average crossed below the 200-day. At that time we raised out stop on XLE to 65.97 corresponding to long term support. It was breached May 30 and today I finally dumped it out our trading account. I sold a couple of other losers today too. But thankfully, the winners we have let ride are still doing well. We will be getting more defensive as the worst four months of the year July-October are coming upon us.

Could higher Crude prices, create a positive ripple effect on stocks globally? Possible! Has higher Crude price "always" correlated with higher stock prices? Nope!

Below looks at the price pattern of Crude Oil over the past 30-years.

CLICK HERE TO ENLARGE CHART ABOVE

Crude Oil has spent around 90% of the past 30-years, inside of rising channel (1). The bottom of this channel was hit 11-months ago, where support held and a strong rally followed.

Crude over the past six months, looks to have created a bullish ascending triangle and is attempting a "dual breakout" of channel and ascending triangle resistance at (3).

A couple of weeks ago the Power of the Pattern shared that the measured move in Crude Oil suggested it could reach at least $75 (Rally 50% from current levels), due to measured move calculations.

Oil Above the 200 day MA $USO $UCO $OIH $SPY $QQQ $IWM $CL_F

Oil is above the 200 Day MA and rallying as you can see below. I am looking for it to move sideways and rally into year end. If this gets above $49 then $52 as stated you could be seeing a longer term bottom move to $65+.

OIH looks even better seen below.

Oh and stocks rally on oil rallies (Joke, they have nothing to do with one another)

Oil Futures $CL_F

  Stay Tuned.

Crude oil prices may be hitting the most significant level of resistance since launching their rally in February.

In a year of interesting market moves, probably the one with the most attention, and ink is the rally in crude oil. Rightly or wrongly, market observers are pinning the ups and downs of just about every market and asset class on the behavior of oil prices. Given the commodity’s obvious influence and significance, the attention is understandable. What people really want to know is -- is the rally for real? and how far will it go? We don’t have a crystal ball and we suggest you avoid those prognosticators who talk as if they do. But we can speak to the action thus far in crude prices and the potential key levels on the chart. And based on that evidence, our view is that the rally in oil prices may now be testing its staunchest resistance to date.

What is the evidence? Consider the Chart Of The Day:

As the chart indicates, the spot price of WTI Crude Oil is hitting a few potentially key levels here around $46. First and foremost would be the Up trendline dating back to the 30-year low in WTI in 1998. The trendline served as support at the lows in 1998, 2001, 2008 and temporarily in March-October 2015. Prices broke below the trendline in November, precipitating the most recent and perhaps final plunge in oil. Subsequently, WTI prices have rallied back to, presently, test the underside of that uptrend line. Theoretically, the former support should serve as resistance.

Additionally, we have the 23.6% Fibonacci Retracement level of the 2014-2016 decline in the vicinity of $46. This is the first significant Fibonacci line to watch. Lastly, we have the lows of January and March 2015, as well as the breakdown point in November here near the same level.

Interestingly, but perhaps not surprisingly, we noted earlier this week that the price of oil stocks, in the form of the NYSE Oil Index (XOI) was also testing a key “make-or-break” level of its own. We probably should not be surprised by the symmetry and, in fact, it likely further validates the analysis of each price series as being at a critical juncture.

Will the oil rally stop here? We have no idea -- but we wouldn’t be surprised to see the rally get clogged up, at least temporarily.

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The Oil Volatility Index convincingly broke below its post-2014 Up trendline today; that could mean less volatility ahead for oil prices.

Volatility indexes have become increasingly accessible and popular in recent years. These are measures of the options market’s expectations for future volatility in the underlying asset. In most markets, the volatility index rises when the underlying falls, indicating an increased expectation of volatility. That’s why these volatility indexes have become known as “fear gauges”. The most well known volatility index is the S&P 500 Volatility Index, better known as the “VIX”. However, there are now volatility indexes covering a wide array of markets, including the oil market. And the Oil Volatility Index, or “OVX”, made a move today that may be sending an important message regarding this currently key asset.

To clarify, the OVX actually tracks volatility expectations on the USO, the United States Oil Fund exchange traded product. However, the effect is the same with regards to the OVX’s relation to oil prices. When oil topped out in June 2014, the OVX established its all-time low since its 2008 inception. Since then, as oil and the USO have been pummeled, the OVX has been in a very clearly defined uptrend. And despite some fits and starts over the past year in the oil market, the OVX has remained relatively sticky in its elevated level, suggesting that market participants have remained steadfastly “fearful”. Today may have signaled the start of a change in that regime.

Why? The OVX dropped exactly 5 points today, or just over 10%. In the process, the index broke the post-2014 Up trendline -- and in decisive fashion. 

Using a logarithmic scale, one can see how the lows in the OVX in June and August 2014, June and November 2015 and earlier this month traced out a very neat Up trendline (FYI, on a linear scale, the post-June 2015 Up trendline was also decisively broken today).

So what does this mean? It means that market participants are, for the first time in years, expecting a lowering of volatility expectations relative to the recent trend. And while we are often tempted to fade what the crowd is thinking, the volatility market often has it right in these situations, i.e., at key junctures or changes in trend.

One example is a post we wrote on March 25 of last year. It highlighted the fact that, while oil prices had recently made a slightly lower low than the January lows, the OVX had held below its prior top, indicating a potentially positive divergence. Similar historical divergences had resolved themselves in higher oil prices and a lower OVX. Indeed, oil prices would immediately rally some 40% before commencing a new down leg.

These OVX signals are not foolproof, however. A case in point -- when oil prices bottomed in February, the OVX did move to a new high instead of diverging. This signal gave us pause in declaring a likely durable oil bottom. However, tops and bottoms will never display unanimity of signals. Thus, we also need to look at tools that may be helpful in determining a change in trend if a top or bottom couldn’t be identified in real-time. That’s where this OVX trendline break may be sending an important message.

I know I have groused about one of our pet peeves, inter-market analysis, on several occasions. Simply put, our view is why try to figure out A by examining B when you can just examine A? In this case, however, at least the OVX is derived from data pertaining to the oil market itself. Thus, our view is that its message is most certainly relevant to the underlying oil prices.

And the message is that the steadily rising uptrend in oil volatility expectations has been snapped. It does not mean that oil prices will go straight up or that the OVX will go straight down. However, it is the first step in establishing a new regime whereby oil volatility is finally more subdued. Often that signals higher prices.

We don’t know for sure if higher prices are in the cards, but if the options market is correct, at least they will be calmer prices.

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“Oil Field Workers” photo by Martin Konopacki Photography (1942).

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