Remember the Taper Tantrum in 2013? Seems like a distant memory. But the U.S. Fed floated the trial balloon that they would start tapering bond purchases from their QE highs of about $85 billion a month. The yield on the 10 year Treasury went from 1.61% in late April 2013 to close the year at a multi-year high at 3%, up more than 100% from its 2012 post financial crisis low:
The Taper began in late 2013, and QE ended in late 2014. ZIRP (zero interest rate policy) then ended in Dec 2015 with the Fed’s first increase of Fed Funds since June 2006. But bond yields didn’t go up as one might have expected, they actually declined, resulting in a fairly well defined downtrend from the early 2014 to make new all time lows in the 10 year treasury yield this past summer just above 1.3%:
Oh, and the U.S. Dollar rallied big league, big league, and has remained range-bound, with the U.S. Dollar Index (DXY) spending the better part of 2015 and 2016 between $92 and $100:
And Crude oil got murdered but is now trying its best to put in a bottom (up 90% from 2016 lows) despite the dollar now heading back to the high end of the its near two year range:
A meaningful breakout above the psychologically important $50 level would yield little technical resistance up until $60, and then an air-pocket to almost $80, staunch support looks like $40.
Energy stocks measured by the XLE, the S&P Energy Select etf (40% of the weight are Exxon, Chevron & Schlumberger) have consolidated in a fairly healthy manner since rallying 30% from their Jan 2016 lows, with apparently healthy support in the mid $60s, very near its 200 day moving average, with two recent rejections at technical resistance at $72:
Fed Fund futures suggest a 71% chance of a rate increase in mid Dec, one reason for the dollar rise and the tick up in rates from the summer lows. This could keep gains capped near term on crude, but it is worth noting that little of the rally off of the 2016 lows has to do with an uptick in demand, or a meaningful reduction in crude supply. This morning we got some decent PMI’s from Europe and Japan, signs of an improving global economy could cause a fundamental impetus for Crude to rally, looking at the 5yr chart and it could be a straight shot to $80 but obvious risk back to about $60 on a failure:
An ideal entry on the long side would be a few dollars lower than here, as the etf has basically straddled its rising 50 day moving average for most of 2016 with moves just a few dollars above and below as it’s gone higher from the low 50’s. Therefore any entry here after such a large but steady move higher should be defined risk and protect against decay:
Buy the XLE ($69.50) Nov/Jan 72 call calendar for $1
- Sell to open 1 Nov 72 call at .50
- Buy to open 1 Jan 72 call for 1.50
Rationale – This is risking just $1 for a breakout play. If the Nov call expires worthless with the etf still below 72 the short strike can then be rolled to December, further reducing risk. The ideal situation is a move higher from here but below 72 into November expiration. Worst case scenario is the etf declines from here but with only $1 risked it is defined, and can be closed for a 50% stop loss.