Chart of the Day: Crude Realities

by Dan November 17, 2014 1:01 pm • Chart of the Day• Commentary

Regular readers know that I am reluctant to make sweeping generalizations when it comes to macro issues.  I read a lot about the prevailing macro themes, but place very few trades using them as the primary input.  I trade stocks, situations, set ups, events etc. And while macro themes shape the trading landscape, rarely are they the make or break reason why I trade a single stock name.

But the price action in Crude Oil and the reasons for the commodity’s 30% decline from the 52 week highs in June leave me fairly curious.  Consensus in the financial media is that the primary reason for the rout is oversupply, margin calls, and the strength of the dollar.  I get all of that, but it seems that all of those reasons combined can’t outweigh one simple truth – that demand is weak in pockets around the world in front of what could be a spreading global recession.

Again, I don’t have any financial evidence to say that what we’re seeing in some geograghies will definitely spread to encompass all of globe, but I am not sure how last night’s acknowledgement of Japan’s recession and the Nikkei’s subsequent 3% decline will not have broader reverberations across global risk assets.  European equities have closed up, and U.S. stocks are unchanged.  The dollar continues to rise against all major currencies, sending gold down and crude down a touch. Consensus seems to be that Japan now has the excuse to delay a tax hike and go even further with Abenomics.

But here is the thing – I am hard pressed to think that Crude Oil’s decline from the high doesn’t have a lot to do with the fact that important segments of the global economy are faltering at a time when the U.S., the one nation that seemed to nail QE, is done with it.  As traders, we usually look for “canaries in the coalmine” so to speak, and despite U.S. equities being a few ticks from its highs, the weakness in Crude, and the strength in Bonds, has to be signalling something less than bullish.  But, you may ask, ” what about gold?”  Totally useless indicator in my view in this new world order of global currency wars.

It’s also important to note that back in 2007, when crude topped out near $148, lots of the same reasons were given for the commodity’s intial decline as are being given now (the dollar was as high as 1.50 to the Euro at its highs, while crude was at its highs, and bottomed out at 1.23, when crude was at its lows in 2009). In hindsight, that was in a world that was living in denial about the financial reality ahead.

The long term chart of Crude looks horrible, despite being very oversold near term:

Crude 2008 to present from Bloomberg
Crude 2008 to present from Bloomberg

I hate to break it to you but it’s hard to extrapolate much from this chart other than pain. It’s broken the uptrend that has been intact since the lows in 2009, and has broken below support that has been in place since late 2009.

Trade Update:  As for those trying to pick a bottom in crude, some of my worst trades of the year on the site have been trying to do just that, after taking my licks in a couple, I am left long a bullish risk reversal in USO (read here) that has precaiously left me short what is now a deep in the money put strike.  I Have been waiting for a bounce above $30, possibly back to the decling 50 day moving avg at $32 to cut my losses, but the etf has been unable to make a sustained rally. I will likley set a hard stop at $28 to cover the Jan 33 put.