Oil 8/7/2011

Here are some quick charts for oil. First a retracement chart anchored on the lows of last May and the highs and May 2011 (interesting, exactly one year between lows and highs).

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I have circled in green the congestion points around Fibonacci lines. On Friday we bounced off the 61.8% line (traditionally the best retracement target) at around $85. That line (not a retracement line then) had acted as support back in February!


Looking at the standard set of indicators (Stochastics (15.3), MACD (12,26), RSI (15) and OBV), we can see some positive signs as both the Stochastics and RSI made turns on Friday's price action. 

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As an aside, I circled in green where OBV punched through the support line on August 1 (pretty decisively actually) which was a giveaway that we should have expected a bad correction! The other indicators were pointing down already, but the volume action was very telling and confirmation!

Oil Retracements 7/20/2011

Here is a new oil chart based on the highs and lows of the year. There seems to be a good line around 99.32 that has acted as support and resistance for the last 2 months. There is apparently support around 90.50 on the down side!

Commitment of Traders - Oil 6/24

Here is an updated chart from Barchart on the commitment of traders:

We took another step down from last week! Big money is leaving the trade...

Oil - June 17

Not a pretty picture with oil at the end of today. Using the lows of February and Highs of last month as anchors for a Fibonnaci study, we can see that the 50% retracement line held for a while (large red circle), acting as support and resistance for close to a month with spikes to the 38% retracement line. But this week has been bad with both the 61.8% retracement line and the 200 DMA broken! The 50 DMA is no decidedly going down and above the 15 DMA.

All my others indicators are now pointing down. The next support line is at 90.50, but it's weak. Real support is around 85 which is where the big money came in during the last rally. But anything is possible on a daily basis especially over a weekend!


The daily lines worked pretty well today again:

It got pretty dicey in the afternoon when S3 was broken (first green circle) but the market recovered around 92.50 (there is a dail fib line there not pictured) and climbed back to S2 (second green circle) by the end of trading. It is not encouraging for the oil market that on a day when the dollar lost over 50 basis points that oil lost ground as well. 

Follow the Big Money on Oil

Looking for an explanation for the oil move in the latest weeks - look no further than the big money leaving the station. Barchart (www.barchart.com) publishes a Commitment of Trader chart updated on a weekly basis. The latest one is below.

The middle chart is the traditional Commitment of Trader (COT) chart. The green line is what is called Large Spec. These are large banks and money managers. The blue chart in the lower chart  (Disaggregated COT) represent Managed Money (commodity traders or advisers). The charts plot the difference between long and short positions of the various groups. The higher the line, the "longer" one group is. Look what has been happening since early May - big money is getting out of oil. They have been driving the price up since last September and now, they are cashing in. And look at the price since then... Surprise!

The Value of Support and Resistance Lines

The move in oil today is the perfect illustration of why it is valuable to have an idea of where the price will "stick" in the coming hours. Drawing support and resistance line based on previous day prices is the easiest way. The formula for calculating the Pivot Point and the Support and Resistance line is available on the Internet. I have programmed Amibroker to display them automatically in my charts at the beginning of the day. Below is today's price action on the oil future market.

The Pivot Point for the day is in gray, the support lines in red. Resistance lines do not appear as they are above 100. The red circles point out congestion areas and support where you can tell that there was some hesitation on the direction. It is not always that clear cut, but these lines usually offer some guidance!

Why is Oil going higher

Barchart.com has some neat charts and one of the most instructive is their Commitment of Traders chart. For example, looking at the Oil COT, we can see that over the past months, there has been a rush of managed money into the oil market fueling that rise in prices. Even retail investors are getting into the act as producers and swap dealers start getting out!

This bears watching as prices should start dropping as soon as managed money starts leaving!

Oil - Support and Resistance 3/10/2011

Here are the support lines for oil this morning. No point showing resistance at this point since I doubt we'll get there. These lines are based on 24 hours trading not just the NYMEX hours. There is so much going on after hours that it's almost pointless to use these lines...

Oil Stuck in a Channel

We have been here before - Oil seems to be stuck in a channel between $88 and $92. 

Despite multiple attempts, they have not been able to keep it over $92 and futures are down 0.6% this morning, coming with $0.20 of the $88 line! They are bouncing back now toward $89, giving more strength to that support line.

Testing 2 More Oil ETF

After I mentioned the study I did on oil ETF, Phil at Phil's Stock World mentioned 2 other ETFs meant to track oil prices - OIL and DBO. I ran 2 quick models and it appears that they suffer the same problem as USO. Here are the results. OIL first:

Even though this tracks well through the big ups and downs of 2007, lately the model sees a divergence. And it is confirmed by the relative performance of OIL and the oil futures over the same period:

Not sure what gives. This seems to be affecting all the oil ETF. How about DBO:

The model tracks incredibly well the first 700 trading days, but since then, we see the same divergence. In terms of relative performance, DBO does better than all the other ETFs. 

But still, 2010 is tough! I would like to see a good explanation from someone on this problem. It's irritating to see a model works with over 90% accuracy for 3 years go haywire in the one year.

Tracking the Price of Oil

I have been running models to see which security tracks the price of oil more closely. The most widely used would of course be the USO ETF, but it suffers from some issues such as contango and backwardation. So in this preliminary round, I will model with not only USO, but also the following ETFs - XLE and OIH. 


Keep in mind that these models are not perfect. They seek only to find a relationship in the form of an equation between the prices of one security and the prices of another. The software relies on neural network to find the closest equation. 


Below are the results of the testing. Let's start with USO. This model runs over the last 1000 trading days. I created the model based on the first 800 days and tested it on out of sample data of 200 days.

 Stastically speaking, the results are not bad. However, the last 400 or so days don't match the model anymore. The big oil run to $150 and its subsequent correction are modeled correctly, but since then, there has been a big divergence which is probably explained by contango. And it's clearer when you look at the 2010 relative performance between the futures and USO:

USO is lagging badly ever since June 2010.


OIH should not suffer from the same ills as USO, however, being a limited basket of stocks, it might be dependent on other factors. Here are the results of the model - same parameters as above.

Based on the stats, OIH doesn't track the oil price as well as USO. But it is somewhat accurate. The model seems to indicate that OIH is underpriced in reference to the price of oil (or oil is too expensive). There is clearly something there, but it's not perfect. And actually, as far as relative performances as concerned, OIH and oil are close this year. 

How about XLE then? It holds not only service companies like OIH, but also integrated and refiners. 

Statstically speaking, it tracks as well as USO but doesn't suffer from the contango and backwardation issues. Being a basket of companies, we can hardly expect perfection, but it seems close enough to be the preferred ETF to track oil prices! The model seems to suggest that it is overpriced relative to the price of oil (or oil is too cheap right!). And the relative performance chart for 2010 seems to confirm that as well. The ETF tracked oil prices very closely during 2010 in any case. 

So there you have it - my winner in this round would be the XLE ETF. 


In future analysis, I will seek to model relationships between oil and companies such as ExxonMobil and Schlumberger.