Professor’s Comments February 3, 2015

Posted by OMS  at February 3rd, 2015

Once again, the Dow fell over 100 points early testing support at 17,000 only to recover and close up 195 points at 17,361. Volume was moderate, coming in at 103 percent of its 10-day moving average.  There were 183 new highs and 71 new lows on the NYSE.

The late day rally caused two of the breadth indicators on The Tide to turn positive, so I turned the indicator light on the cockpit back to Yellow.

The Dean’s List remains negative as do the PT indicators.  So with mixed indicators, we’re back in No Man’s Land.

In other words, because the Dow did not fall below 17,000, and fall hard which is necessary for me to conclude that wave 3 of Major Wave 1 down is underway, it’s still possible that the Dow could start a significant rally from current levels.

If a rally does start to materialize, it would be the final leg up of the Ending Diagonal Pattern or wave 5 up.

Right now, with mixed indicators and two possible scenarios still on the Board, I’m still leaning toward the wave 3 of 1 scenario, mainly because the CCI on the Dow remains in the Trend Mode (CCI<-100).  However I have to tell you that the breadth is not what I would like to see if an impulse wave down is starting.

My energy stocks got nice pop yesterday as crude oil moved back above $50 per barrel.  HAL gained a $1.52 to 41.51.  It’s 35-period CCI moved back into the Trend Mode. Yesterday’s pop caused the Bollinger Bands to expand. I like it when I see narrow Bands starting to expand.

Last night, Emeritus, my Trend Algorithm, highlighted three energy stocks or the Honor Roll.  It’s usually a good idea to pay attention when Emeritus starts to highlight several stocks from the same sector for the Honor Roll.  When I looked at the stocks, it made me think about a possible conversation that might have taken place last week in Saudi Arabia:   Remember, the conversation is only hypothetical…..

Picture this:  The old king of Saudi Arabia, King Abdula, has died.  You’re the new King Salman.  During the past week, several members of OPEC have come to the funeral and have stayed on for a few days.  They asked if they could discuss a few issues associated with the Kingdom’s turnover.

Remember, you’re the new King.  You don’t know how to be a King yet, so you agree to the talk with the other leaders.  You’re trying to make nice.

Anyhow, during the meeting, one of the OPEC members says to you, “Hey Salman, how much longer are you gonna keep oil prices low?  Don’t you know that old Abdula really screwed up when he decided to keep production at the current levels.  This stupid policy is killing us!  Can’t you slow the pumps down a bit?  I don’t even have enough money to go shopping in Dubai.  I was talking with my friends from  Nigeria and Libya, and they don’t even have enough money to run their country.  They’re going to have riots.  And the Russians are really angry.  We saw what happened when they got pissed at the Ukrainians… they took the Crimea.  I can almost hear their tanks rumbling at night when I go to sleep.  And if they decide to invade us, the Americans won’t do anything to stop them this time.  They have enough oil of their own and don’t need us anymore.  Crude under $50 is NOT good for any of us.  Can’t you do something?”

Hmmm?  Do you think that conversations along these lines are taking place now in the mid-East?  I do.

I also believe that these conversations are going to start impacting crude prices.

There are two reasons I believe that crude prices will start to rise soon.

The first is the pattern.  I believe crude oil is in a major wave 4 triangle.  And after it bottoms on this leg, it should rise to about $90 on the next leg, before dropping back to about $70.  After that crude could be off to the races.  We’ll see.  Right now, I’m just focusing on a possible rally to $90.

Then second reason has to do with timing.  The period leading into March and April is usually a very good time to trade energy stocks and crude oil.  This is the time when refiners start to switch over to summer-blend fuels, a process that begins each February and ends June 1.  Since the implementation of the Clean Air Act of 2000, the seasonal transition to summer-blend fuel has caused gasoline prices climb significantly during these months before they reached their peak in the summer.

Demand for gasoline is usually low in the first two months of the year, so many refineries use this period to do maintenance and retool to produce the summer blends.

There are only about 144 refineries in the U.S now, about half the number that were in operation in 1980.  So the maintenance must be scheduled and coordinated to ensure that the refineries aren’t all down at the same time.  And sometimes during this ‘maintenance’ period, things go wrong.  Sometimes the maintenance is more complicated than originally planned or problems are discovered that awhile to fix.  This tends to delay production and impacts supply.

Also, the refineries in the U.S. are getting old.  And old means that replacement parts are not readily available.  In many instances, the worn-out pumps or valves discovered during maintenance can’t simply be replaced.  They usually require a new design, with new hardware and software and re-wiring.  In other words, the fix starts to get complicated.   And any delay can have a big impact on the amount of fuel being produced.  It doesn’t take a lot of refineries with problems before fuel prices are impacted.  One or two going down is usually enough to cause a significant impact.

This is why I love to trade energy in the spring.  The chances for a disruption in the supply of crude oil and gasoline are high.

And if King Salman starts to feel pressure from his OPEC buddies, and starts to cut back on production…even a little,  crude prices could rebound in a hurry.

You don’t have to be in Saudi Arabia to know what’s going on with crude oil and energy stocks.  Just pay attention to the Dean’s List and your indicators.  If  DIG starts to replace DUG on the Dean’s List, I’m trading energy.  It’s what I start looking to do in February.

That’s what I’m doing,

h

BTW, higher crude prices could be the reason for a rally in the Dow. Remember, CVX and XOM are Dow components.

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
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