NFTRH; Oil to Target, Now What?

Per the simple measurement of this chart and others like it we have used, we find WTI crude oil at target this morning.


Let’s remember that targets are not stop signs, they are objectives based on pattern measurements.

Yet the news cannot get much worse for the price of oil or better for US consumers using their strong dollars to fill gas and heating oil tanks.  These are each evolving themes as we head into 2015.  The big news item (flash point) is OPEC’s decision not to cut production.  It could be an (!) on the oil decline.

A subscriber asked if I would recommend buying oil stocks now and my answer is as usual, involved.

Being a macro guy, I’d want to ask that question through the lens of the economy and in particular the question of whether the ‘as good as it gets’ atmosphere (incl. happy consumers at the pump) is going to endure.

If so, then yes, I’d say oil stocks are a buy on this wipe out and we would cover some of them or the sector.  Of course, we spotlighted Canadian Oil & Gas company Enerplus (ERF) in NFTRH 318 and it got hammered yesterday on the Canadian TSX.

While on this subject, when NFTRH+ notes stop loss levels it is for this reason.  ERF spent Wednesday below 15, which was noted as the stop loss point.  A great lesson in discipline.  I only wish I’d had some as I out thought myself with the idea that the Wednesday drop had more to do with post-dividend dynamics than the impending OPEC issue.

Yet another lesson to be reaffirmed?  The idea generator (complete with disciplined parameters) is not to be confused with the individual trader, who makes the same mistakes as most fallible humans.

Back on oil, it was deeply over sold by the weekly chart we showed in #318.  It is ever more so now and at a target.  But the issue for me is the global economy, including the US.  We did not review the Semiconductor book-to-bill data for example, in order to promote a favored view.  We should not be rooting for any individual outcome (incl. the favored view of global economic contraction that would ultimately favor the gold sector).

Very simply, if a strong dollar starts to pressure the Semi’s and US manufacturing and exporting sectors and contraction starts to come on the table I suppose there could be snap back trades in the oil sector but on a bigger picture they would be bearish along with everything else that is positively correlated to global growth.

If however, we get the best of all worlds for the US (strong dollar, consumer economy, cheap gas, cheap heating oil, cheap materials, etc.) this could eventually bring on a self-fulfilling rally in the energy sector.  That is all for future analysis heading into 2015.

However, US Shale production or not, I view the declining price of oil, the weak prices of base metals and other bearish commodities as ultimately a sign of global economic weakness and am not at the point to want to buy that weakness because the NFTRH macro theme is still economic contraction being fought by ever more desperate policy making and I don’t think that is going to succeed in a lasting way.

We can be aware that there is another story generating that favors US stock bulls and that is that OPEC just delivered QE4 to the US consumer.  That sounds like hype, but it is also the kind of thing that would feed the blow off scenario we have been allowing for in US stocks.

I wish I could give an easy answer like yes oil stocks are a buy… or they are not, avoid.  But this is just not an easy macro environment.  It is involved and thus the answers to even the most basic questions are involved as well.  At least from my perspective.  We will surely decode the situation step by step heading into 2015, taking clues and probabilities and putting it all together in the ways that make the most sense.