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Crude Oil Down Over 10% In Past Week

  • WTI falls through the bottom end of its trading range

  • Brent rolls from October to November futures

  • Bullish and bearish factors continue to grip the oil market- Inventories and production point higher

Trading crude oil and looking for another significant move to the up or downside had been like watching paint dry since June. The decline to an all-time low in NYMEX WTI futures and the lowest price of this century in Brent futures gave way to a recovery that took the price of the energy commodity to over the $40 per barrel level. Nearby NYMEX futures first reached $40 in early June. Since then, the market had gone into a volatility coma, but the price settled below the level at the end of last week.

Weekly historical volatility on the WTI futures was around 20% to 25% level at the start of 2020. In May, it rose to over 172%. At the end of last week, the metric was back at 25%.

Bullish and bearish factors are pulling the price of the energy commodity in opposite directions as of September 4. Demand remains a critical concern, but production declines have gone a long way to balance the petroleum market's fundamental equation. While the trend remains higher, crude oil tends to take the stairs higher and an elevator shaft to the downside over time.

The slide in the US stock market last week was a warning sign for the petroleum market. The United States Oil Fund (USO) tracks the NYMEX WTI futures price, while the United States Brent Oil Fund (BNO) follows Brent futures on the Intercontinental Exchange.

WTI falls through the bottom end of its trading range

Crude oil took an elevator shaft to the downside earlier this year before recovering to over $40 per barrel. The bullish trend was in question at the end of last week.

The ascent of the energy commodity had been a slow crawl to the upside, but the decline below $40 on the back of weakness in the US stock market ked to a test of technical support at $39, the double-bottom low, which failed to hold.  

Source: CQG

As the daily chart of NYMEX October crude oil futures highlights, the price settled at the $39.77 per barrel level at the end of last week. On Tuesday, September 8, the price was trading around the $36.30 level. The total number of open long and short positions has been flatlining at around the two million contract level over the past two months. The correction from the August 26 high of $43.78 caused price momentum and relative strength indicators to fall below neutral readings to oversold conditions.

Since June 30, the price range had been from $39.00 to $43.78 per barrel. The $39 low on July 10 and July 30 created a double-bottom formation on the daily chart, which was critical support. The narrow trading range pushed daily historical volatility to 30% at the end of last week. The metric reached a high of over 153.5% in March. On September 8, it was over 47%.

The midpoint over the past two months is at $41.39 per barrel. The price moved below the lows in a short-term technical breakdown in the energy commodity.

Brent rolls from October to November futures

On the final day of August, Brent futures on the Intercontinental Exchange rolled from October to November. Brent is the pricing mechanism for approximately two-thirds of the world's crude oil, including the petroleum from the Middle East. The region is home to over half the world's crude oil reserves.

 

Source: Barchart

The chart shows that Brent futures have traded in a range from $40.35 to $46.59 since late June. The trend in the Brent futures was higher, with a midpoint at $43.47. However, at below $40 on September 8, Brent futures fell through the bottom end of the band over the past two months. Brent and WTI futures crawled higher, as fundamentals were supportive of the price. The correction in the stock market caused a return of the elevator ride lower at the start of this week.

Bullish and bearish factors continue to grip the oil market- Inventories and production point higher

Crude oil never away on the upside after reaching the $40 per barrel level. The memory of the price carnage on the downside that led to the April low of a negative price for WTI and the lowest price of this century for Brent continues to weigh on the price action.

Fears that demand could evaporate because of a resurgence of COVID-19 during the winter months is the primary bearish factor hanging over the market. The recent weakness in the stock market weighed on the price of the energy commodity. Meanwhile, the winter months tend to be a bearish seasonal period for the energy commodity.

On the bullish side of the oil market, production and inventories have been highly supportive over the past weeks. OPEC, Russia, and other producers continue to maintain a 7.7 million barrel per day cut, after tapering the level from 9.7 mbpd in August. US output has dropped, with the Energy Information Administration reporting 9.7 mbpd for the week ending on August 28.

The level of US production declined 26% from record high level in March 2020. In the latest report, the EIA said production fell by 1.1 mbpd. The decline was because of hurricane Laura's impact on petroleum production in the states on the Gulf of Mexico.

At the same time, the American Petroleum Institute and Energy Information Administration reported the sixth straight week of falling inventories for the week ending on August 28.

Source: API

Since the week ending July 24, crude oil stocks have dropped by 34.965 million barrels. Gasoline inventories moved 9.128 million barrels lower, and distillate stocks rose by only 0.933 million barrels.

Source: EIA

Over the same period, the EIA reported a decline of 38.2 million barrels of crude oil. Gasoline inventories moved 11.781 million barrels lower, and distillate stocks dropped by 0.300 million barrels.

The inventory data in the US continues to support the price of crude oil futures though they fell below the $40 per barrel at the end of last week on the NYMEX October futures contract. The November Brent futures at under $40 have some support from the decline in OPEC, Russian, and other producers' output.

Crude oil's bullish trend turned lower over the recent sessions. The memories of the decline that took prices to lows in April and concerns over demand continue to prevent the price from moving appreciably higher. Crude oil was heading for a test of the mid-June $35.25 per barrel level on October NYMEX futures, the mid-June low. A move below there could open the floodgates on the downside.

The settlement at the lowest price since June 26 on the October WTI futures contract was a warning sign for the energy commodity last week. On Tuesday, it followed through on the downside, rekindling fears that another period of price carnage could be on the horizon.

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The United States Oil Fund (USO) was trading at $26.73 per share on Tuesday afternoon, down $1.78 (-6.24%). Year-to-date, USO has declined -73.92%, versus a 5.29% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #69 of 112 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO September 8, 2020 2:49pm

Silver: Time for Patience

It's been a volatile couple of weeks for investors in silver (SLV) following the metal's 13% decline in mid-August, which put a dent in its upside momentum. The significant reversal at the $30.00/oz level has pushed the momentum in favor of the bears for the time being, and often corrections after parabolic rallies like this take at least eight to sixteen weeks to complete.

This is because it takes a while for speculators to lose interest in an asset class and sell out of disgust after they've just witnessed a powerful advance.

The good news is that while this correction might be frustrating for the bulls, especially those looking for $50.00/oz by year-end, the long-term picture will remain bullish as long as the $23.50/oz level is defended on a weekly close. Let's take a closer look at the weight of evidence below:

A picture containing outdoor, water, person Description automatically generated

(Source: Daily Sentiment Index Data, Author's Chart)

If we begin with bullish sentiment for silver, it's been a wild year, as we saw sentiment drop to just 4% bulls in early March before sentiment rose to a new multi-year high at 97% bulls three weeks ago. These massive shifts in sentiment in a short period (lows to highs) often mark tops for a commodity, hence why there was elevated risk in the metal a few weeks ago when speculators were elbowing each other to get into the trade.

While short-term sentiment has cooled off a little with the violent drop on August 11th, the long-term moving average for bullish sentiment remains in the cautious zone at 82% bulls. This suggests that while bounces are possible and we are making progress on unwinding this crowded trade, it will likely be very difficult for silver to make new highs before October.

A screenshot of a cell phone Description automatically generated

(Source: TC2000.com)

As I noted a few weeks ago, silver was printing several caution signals in a row (orange bars) with the metal more than 30% above its acceleration bands heading into mid-August. While this rally continued a little longer than I expected with five consecutive caution signals, the gains from these types of advances are typically ephemeral, and this is precisely what we saw.

Not only was this whole advance retraced entirely, but it only took one day for this to occur. Fortunately, we are no longer on caution bars despite trading at similar levels as the overbought readings have subsided. However, we still remain extended on a short-term basis, more than 25% above the metal's long-term moving average.

A picture containing clock Description automatically generated

(Source: TC2000.com)

Finally, if we look at key support and resistance levels above, we can see strong support at $21.50/oz near the multi-year breakout area and strong resistance at $27.80/oz.

While the metal has made a few attempts to get above this resistance level at $27.80/oz, a clean weekly close above this level will be required to remove this resistance and increase the probability that the correction is over. Therefore, while we've seen the worst of the correction with the dip to $23.50/oz from a price standpoint, the correction has not satisfied the time element, so I see no reason to rush into the miners or silver near $28.00/oz.

So, what's the best course of action?

Given that silver has registered a massive monthly breakout above $21.50/oz, the bulls will remain in complete control of the bigger picture as long as they defend $23.50/oz. However, I prefer to buy and silver when we see excessive fear in the market, or at a bare minimum, indecision.

After a 120% rally in 100 days off of the March lows, it's going to take some more choppy price action to put make the bulls begin to doubt this rally.

Currently, I am keeping a close eye on Pan American Silver (PAAS) and Silvercrest Metals (SILV) to add to my position, and I would get very interested in adding to silver if it came down near $24.00/oz to create a double bottom. At this juncture, I see no reason to aggressively add to metals or miners as there is minimal evidence that this correction is complete just yet.  Therefore, patience is required here, in my opinion, as the lowest-risk entry points have still not arrived yet.

Disclosure: I am long PAAS, SILV

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The iShares Silver Trust (SLV) was trading at $25.00 per share on Thursday afternoon, down $0.55 (-2.15%). Year-to-date, SLV has gained 49.88%, versus a 8.84% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:SLV September 3, 2020 1:01pm

Natural Gas: Important Levels to Watch

NYSE:UNG September 3, 2020 11:47am

Gold: Bulls Remain In Control

It's been an eventful couple of weeks for the yellow metal (GLD) as gold's rally was derailed by a 7% daily drop in mid-August, and a drop to nearly $1,850/oz the following day. However, while this has certainly put a little doubt in some market participants' minds, it's worth noting that zero technical damage has been done to date.

This is because gold continues to trade above its key monthly moving averages, and the metal remains above its all-time high breakout made in late July.

While bullish sentiment continues to be a minor headwind to future rallies, I see no reason to give up on the metal here, and I ultimately expect that we'll see another set of new all-time highs before year-end.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

The gold price's recent correction has put what looks like a severe dent in the Gold vs. S&P-500 (SPY) ratio, with the ratio making a lower low and a lower high since April.

However, while we certainly have seen a slight departure from the strong uptrend we saw in Q1, it's worth noting that this ratio remains above its key moving averages despite being up against one of the strongest rallies in history in the S&P-500.

Currently, the S&P-500 is up over 60% in less than 115 trading days. The fact that the Gold vs. SPX ratio has held its ground regardless of this near parabolic advance is incredible.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

As we can see, if we take a bigger picture view, this ratio finally turned in early 2020 and reclaimed a multi-year resistance level (white line) dating back to 2011.

This was a significant change in character for the bulls and suggested that it was time to begin adding some gold exposure and miner exposure to one's portfolio.

However, even though this pullback has pushed the ratio down from 0.65 to 0.56 since April, the ratio remains above the short-term momentum line (green line) and the long-term moving average.

Notably, the long-term moving average is turning and finally assuming a positive slope. Therefore, while this correction in the ratio could go on a little longer, I see no reason to lose faith in this ratio's ability to maintain its bullish posture. Based on this, an allocation to gold and miners continues to make sense.

A picture containing clock Description automatically generated

(Source: TC2000.com)

If we zoom into the 4-hour chart below, we are clearly wading through a short-term correction, but the correction structure has been very normal. Other than the one-day plunge on August 11th that brought with it a significant increase in volatility, gold has been carving out a bullish continuation pattern since.

While there's no reason to believe that gold is going to head higher in a straight line from here, this pattern suggests that further consolidation would not be surprising, but the worst-case low for this correction is likely to be $1,800/oz.

Therefore, any re-test of the August 11th low or undercut of this low would be an area to look to add some exposure incrementally.

A picture containing screenshot, clock Description automatically generated

(Source: TC2000.com)

If we zoom out to a big picture view, gold couldn't look more bullish, as it's just emerged from a nearly 10-year breakout to new all-time highs.

Currently, there are no asset classes with a breakout of this magnitude to new all-time highs, suggesting that for investors looking to get in on the ground floor of a new bull market, gold is the most suitable place to be parking some of one's money.

As long as the bulls can continue to defend the $1,890/oz level on a quarterly closing basis (September close), this breakout will remain valid.

While some investors might be getting nervous that we've seen the top in gold or that much lower prices are ahead, I don't see any reason to be worried here.

While it's possible that the metal could consolidate in the $1,795/oz to $1,2045/oz range for the next month or two to reset bullish sentiment, ultimately, I expect the metal to make new all-time highs before year-end.

Therefore, buying the metal today near $2,000/oz might not be wise; any sharp pullbacks should provide low-risk buying opportunities.

For now, I have no plans to add to my position in gold, but I remain long several miners, and long gold from $1,450/oz last year. As long as gold continues to stay above $1,750/oz, I plan to stick with my position.

Disclosure: I am long GLD, AU, KL, SILV

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Want More Great Investing Ideas? 7 Best ETFs for the NEXT Bull Market Beware Stocks in September? 9 "BUY THE DIP" Growth Stocks for 2020
The SPDR Gold Shares (GLD) was trading at $185.25 per share on Tuesday morning, up $0.42 (+0.23%). Year-to-date, GLD has gained 29.64%, versus a 10.19% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:GLD September 1, 2020 11:10am

OPEC Is Optimistic as Crude Oil Remains Stable and Near the Recent High

NYSE:USO September 1, 2020 9:21am

Natural Gas Is Overbought, But the Price Continues to Rally

NYSE:UNG August 31, 2020 9:25am

Natural Gas Hits 2020 Highs, Will the Rally Continue?

NYSE:UNG August 27, 2020 2:09pm

Silver Bullish Sentiment Remains Elevated Despite Correction

It's been nearly two weeks since the 15% daily rout in the silver market (SLV), with the decline sending most silver miners (SIL) down 25% or more from their August highs.

While this sharp correction has helped to relieve overbought conditions in both the miners and silver, it hasn't done anything to fix sentiment, which remains at the highest levels in nearly a decade.

This suggests that there could be more consolidation ahead for the metal before it tries to make another run at the $30.00/oz area and that there's no need to aggressively position in miners here with silver at $27.00/oz. Let's take a closer look below:

A picture containing outdoor, water, person Description automatically generated

(Source: Daily Sentiment Index, Author's Chart)

As the chart above shows, the long-term moving average that measures bullish sentiment in silver (white line) remains at lofty levels and has barely budged despite a 20% correction in the metal. This is generally not a good sign.

The more reliable bottoms show up when market participants throw in the towel and puke up their positions, not when they are frustrated to have gone through a drawdown but remain predominantly bullish. Based on the current reading of 84% in silver, I would argue that there's limited fear in the trade, and the crowded trade has not yet been unwound.

While this doesn't mean that we need to see lower prices below the $23.50/oz low to fix this reading, it does suggest that we'll need to correct through time or price. Therefore, while some investors might be hoping for a new high in silver within the next couple of weeks, I think it's unlikely.

A screenshot of a video game Description automatically generated

(Source: TC2000.com)

If we look at the weekly chart above, we remain nestled against resistance at $27.80/oz, with no strong support until the $21.50/oz level. Therefore, while we have seen a sharp correction from the highs, the reward to risk isn't great at current levels with support much lower.

If the bulls could manage to get through the $27.80/oz on a weekly close, I would be more open-minded that this could be a short-term consolidation and that we could see new highs by as early as October.

However, as long as we are $27.80/oz on a weekly closing basis, a re-test of $23.50/oz low is entirely possible.

A screenshot of a video game Description automatically generated

(Source: TC2000.com)

Zooming in further to a daily chart, we can see that silver remains quite extended above its 200-day moving average (yellow line), and it's rare to see sustained upside when the metal is more than 50% above its moving.

Therefore, this corroborates the view that we're unlikely to see new highs in the next couple of weeks in silver. The good news for the bulls is that trading sideways in a range between $23.50/oz - $30.00/oz would be a bullish development, as we often see a multi-week base built following a major breakout.

Given the 5-year breakout for silver above the $21.50/oz level, I would view any corrections that remain above this breakout area to be noise. However, while we're in the upper end of this range near $27.00/oz, the reward to risk remains balanced at best.

So, what's the best course of action here?

Given that sentiment remains elevated for silver and we continue to remain extended technically, I believe the best move is patience to wait for new setups to develop.

If this truly is a successful breakout for silver, we should see the $23.50/oz level defended on a weekly closing basis, and pullbacks below $24.00/oz should be low-risk buying opportunities.

Therefore, I am in no rush to add new exposure, but if the metal pulls back and sentiment also cools off, this would tell us we're getting closer to preparing for what's likely to be another leg higher in Q4.

In summary, I see this as a buy the dip market, but the low-risk trade is beginning to add exposure below $24.00/oz, not near $27.00/oz, while the bulls remain convinced that new highs are imminent.

Disclosure: I am long PAAS, SILV, GLGDF

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The iShares Silver Trust (SLV) was trading at $24.69 per share on Tuesday morning, up $0.09 (+0.37%). Year-to-date, SLV has gained 48.02%, versus a 7.61% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 34 ETFs in the Precious Metals ETFs category.

About the Author: Taylor Dart

taylor-dartTaylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
NYSE:SLV August 25, 2020 11:02am

Natural Gas Rises to Overbought Territory

NYSE:UNG August 25, 2020 9:32am

Crude Oil Crawling Higher

  • An elevator ride lower and then climbing the staircase to the upside- September futures roll to October

  • Inventory and production data remain bullish

  • Balancing the equation to allow for a continuation of the bullish crawl

Over the past weeks, some of the leading industrial commodities have been sending a signal to the crude oil market.

The price of lumber rose to a new all-time high at $830.90 on August 21. Before the most recent rally, wood futures peaked at $659 per 1,000 board feet in May 2018.

Last week, copper futures on COMEX probed above $3 per pound for the first time since June 2018. The demand for wood and copper that lifted the price is a function of some supply disruptions and the US dollar's falling value against other currencies.

The dollar is the pricing mechanism for most commodities, and a weakening greenback often has a bullish impact on raw material prices.

Copper and lumber are industrial commodities, and so is crude oil.

The energy commodity hit a low, along with lumber and copper, in March when the global pandemic caused risk-off conditions in markets across all asset classes.

Since then, the prices of WTI and Brent crude oil futures that trade on the NYMEX and ICE have been crawling higher.

The price action in the base metal and wood markets could be a sign that crude oil is heading for the $50 per barrel level sooner rather than later. The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) track the prices of the two benchmark petroleum futures markets higher and lower.

An elevator ride lower and then climbing the staircase to the upside- September futures roll to October

The price of nearby NYMEX crude oil traded to a high of $65.65 per barrel in early January. In late April, it was $105.97 lower at the negative $40.32 level.

The wide contango or forward premium caused the September contract to fall to $21.99, and October futures reached a bottom at $23.25. Over the past week, September futures on NYMEX rolled to October.

Source: CQG

The new active month October contract shows that the peak on August 5 was at $43.68 per barrel, and the price was trading at just below that level. After taking an elevator shaft to the downside earlier this year, the price has made higher lows and higher highs.

Price momentum and relative strength indicators were above neutral readings at the end of last week.

The total number of open long and short positions in the NYMEX crude oil market has been stable at the two-million-contract level.

Daily historical volatility at 17.5% declined from a high of almost 155% in March. The daily price ranges have narrowed dramatically over the past months as crude oil has been on a staircase to the upside.

Inventory and production data remain bullish

Last week, the inventory data from the API and EIA remained upbeat with the fourth consecutive week of declines in crude oil inventories.

The API reported a decline of 4.264 million barrels for the week ending on August 14. While gasoline stocks rose by 4.991 million barrels, distillates fell by 964,000 barrels. The EIA said that crude oil inventories fell by 1.60 million barrels with a decline of 3.3 million barrels in gasoline stocks.

Distillate only rose by 200,000 barrels. The inventory data was a sign of demand for the energy commodity. Meanwhile, at 10.7 million barrels per day, US production was 18.3% below the peak output level in March.

When it comes to OPEC, Russia, and other leading world producers, the group tapered its production cut from 9.7 million barrels per day in July to 7.7 mbpd in August.

At the most recent meeting, the group concentrated on compliance with the production quotas and did not change the level for the coming month. OPEC and Russia continued to express concern about demand, saying, "the pace of recovery appeared to be slower than anticipated."

Balancing the equation to allow for a continuation of the bullish crawl

Inventory and production data have balanced the fundamental equation for crude oil with the price above the $40 per barrel level. The fundamental and technical position of the crude oil market continues to support the slow and steady crawl to the upside.

Meanwhile, a falling dollar, interest rates at historic lows, and government and central bank stimulus combine to create a potent bullish cocktail for commodity prices. Copper rose to its highest price in over two years last week.

Lumber reached an all-time peak and traded at over $830 per 1,000 board feet over recent sessions. In May 2018, the price of wood reached a record high at $659. Before that, the record level was at $493.50 in 1993. Gold recently moved to a new all-time peak.

The price of crude oil continues to edge slowly higher. The price action in many other commodities could be telling us that higher oil prices are on the horizon.

Resistance on October futures is at $43.68 and at $54.50 on the continuous contract. Support stands at $39 and $38.72. Risk-reward continues to favor the upside in crude oil. However, any sudden decline in the US stock market could change the current path of least resistance for the energy commodity.

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The U.S. Oil Fund LP (USO) rose $0.18 (+0.60%) in premarket trading Monday. Year-to-date, USO has declined -70.34%, versus a 7.44% rise in the benchmark S&P 500 index during the same period. USO currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #73 of 111 ETFs in the Commodity ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
NYSE:USO August 24, 2020 9:47am

Is a Natural Gas Correction On the Horizon?

NYSE:UNG August 20, 2020 12:58pm

Gold: Long-Term Picture Remains Bullish

It's been a tough week and a half for precious metals investors as the yellow metal (GLD) has been beaten to a pulp after a couple of days spent residing above the $2,000/oz level.

This violent pullback of more than 10% has some second-guessing whether the metal has topped out, but history would suggest that this isn't likely the case.

While bullish sentiment remains in nosebleed territory which points to further consolidation as highly likely, there are no warning signs present to suggest this bull market has run its course at this time.

The current picture looks very similar to the 2005-2006 period based on one indicator, and gold saw a tremendous run, nearly doubling in the following three years. Let's take a closer look at the weight of evidence below:

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

Beginning with a chart of the Gold to S&P-500 ratio (SPY), we can see that gold finally broke above its long-term moving average in February and has remained above this key moving average since.

This is a bullish development as it shows that the metal is outperforming the general markets, and we often see much higher investment in mining stocks when this signal is on a bullish ratio.

While the recent pullback has been quite significant for gold and has this ratio trending lower, I would consider any corrections to be noise.

This is because as long as gold remains above this moving average (white line), the bullish signal on the ratio will remain intact.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

If we take a look at the 2004-2008 period, we saw something very similar to the Gold vs. SPX ratio as the ratio consolidated for over a year after an extended downtrend and then finally broke above the moving average in 2005.

Following this breakout, we saw a 15% rally and then a pullback of 12%, which is quite similar to the 20% rally we've seen since February and pullback of roughly 10% from early August.

However, the main takeaway from this chart is that the first break and hold above this long-term moving average is a very bullish development long-term.

As we can see, this was just the beginning of the bull market, as the Gold vs. S&P-500 would trend higher with corrections along the way for another six years.

Therefore, given that we just saw the Gold vs. S&P-500 ratio break out in February, I would argue we're likely in the first few innings of this gold bull market, and nowhere near a long-term top.

This does not mean that gold can't endure 12-17% pullbacks as bull markets can see nasty shake-outs, but it does suggest that 13% plus corrections are likely to be long-term buying opportunities.

A picture containing screenshot Description automatically generated

(Source: TC2000.com)

If we take a look at the above daily chart for gold, we've fortunately worn off the sentiment sell signal we ran into during early August, where I warned that it not a good time to be adding exposure.

However, while we're no longer on a sentiment sell signal, we're still in nosebleed territory here.

This means that while bounces are possible, I believe it's very unlikely we'll see new highs in gold before October.

If we were to see $2,100/oz before October, this would be a bearish development, as it would push sentiment from a short-term sell signal to a long-term sell signal.

Instead, what investors want to see is gold consolidate between $1,775/oz to $2,075/oz over the next two months, as this would allow the impatient traders to leave the trade and allow sentiment to reset.

There's no guarantee that the market will take the ideal path, but this may be the healthiest thing for the gold market currently.

A close up of a logo Description automatically generated

(Source: Daily Sentiment Index, Author's Chart)

So, what's the best course of action here?

Given that we have bullish sentiment for gold in nosebleed territory but just outside last week's sentiment sell signal, I see no reason to rush into the metal.

While bounces are possible as gold can be quite volatile, I see a 50% chance of gold re-testing its lows at $1,860/oz before this correction has run its course, and I would be very surprised if gold made new highs before October. Based on this, I see no reason to be aggressive here.

Having said that, if the metal were to pullback towards $1,805/oz and sentiment begins to reset, this would set up a low-risk buying opportunity heading into what I believe will be a strong Q4 for the metal.

In summary, while this correction has been nasty, it's unlikely to have long-term consequences as the Gold vs. S&P-500 ratio remains bullish.

However, aggressively buying gold here with sentiment still in nosebleed territory is likely not the best move, so while I am holding several miners and gold, I am not adding to my positions just yet.

Disclosure: I am long GLD, KL, AU

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The SPDR Gold Shares (GLD) was trading at $181.22 per share on Thursday morning, down $1.02 (-0.56%). Year-to-date, GLD has gained 26.82%, versus a 5.66% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.
NYSE:GLD August 20, 2020 10:22am

Silver: Bullish Sentiment Remains A Headwind

It’s been a volatile past week and a half for the precious metals market, with silver (SLV) getting hit the hardest, falling over 20% from its early August highs.

While we’ve seen an impressive recovery since the lows near $23.50/oz, we have one issue remaining: sentiment. Even though the sharp correction has managed to relieve the previous overbought condition in silver, we have seen absolutely no improvement in bullish sentiment, with sentiment readings sitting at their highest levels since the 2011 peak.

This is not ideal, as it suggests that we saw minimal fear during the pullback, and we continue to remain on a short-term sell signal based on sentiment. Given the lack of improvement in bullish sentiment, I see no reason to be starting new positions in silver above $28.75/oz.

A screenshot of a video game Description automatically generated

(Source: TC2000.com)

Many bulls are cheering recovery we've seen in silver over the past week, convinced that the selling pressured is completely behind us. However, while this relentless rally in silver off of the $23.50/oz lows is certainly impressive, I am not convinced that the metal is immediately heading back to new highs above $31.00/oz.

Unfortunately, while the correction allowed the metals' moving averages to catch up a little, bullish sentiment hasn't budged, which is alarming when we've seen a more than 20% correction in a week. Generally, we would expect sentiment to shift from extreme optimism to at least neutral after a pullback of this magnitude, but this isn't what we've seen at all.

A picture containing water, person, group Description automatically generated

(Source: Daily Sentiment Index Data, Author’s Chart)

As the chart above shows, the long-term moving average of bullish sentiment for silver is currently sitting at 85%, the 2nd highest reading in the last decade. This suggests that we’ve seen no real fear whatsoever for silver during the recent pullback. In fact, on the day that silver slid more than 10%, we had a reading of 68% bulls or more than two bulls for every one bear.

Based on these elevated sentiment readings, I would argue that this trade remains quite crowded short-term, as the bulls are unwilling to waver even in the face of adverse price action. While this doesn’t mean that we have to head back down to revisit the lows at $23.50/oz, it does mean that the reward to risk here is very poor when it comes to entering new positions above $28.75/oz.

A screenshot of a computer Description automatically generated

(Source: TC2000.com)

If we take a look at the technical picture, we’ve got short-term resistance for silver at $27.80/oz, and this is a pivotal level for the bulls on a weekly close. While the intra-week rally above $27.80 suggests that the correction could be over, the bulls will need to get above $27.80/oz on the Friday close to increase the probabilities of this.

Unfortunately, whether the correction is over or not, we have strong support at $21.50/oz and are nestled right against resistance at $27.80/oz, which means there’s no great setup here for going long.

Based on the fact that sentiment remains on a short-term sell signal here, I would argue that there is a higher probability of this rally running into selling pressure between $28.50/oz to $29.00/oz, and I would not rule a pullback to $24.50/oz before this correction has run its course.

So, what’s the best course of action?

As noted in previous updates, I took some profits on my silver miners (SIL) in early August to re-balance any overweight positions.

While I remain long core positions in silver miners, I do not believe this is the time to be adding any new exposure. I prefer to start new positions when the majority is either hesitant or terrified, and we don’t have either setup here. Instead, we have the majority as bullish as ever, with the most bulls in silver since the 2011 peak.

While this doesn’t mean that silver is building a long-term top here, it does suggest that the $29.50 - $30.00/oz area could be a short-term top, and it’s less likely that we’ll see a V-shaped recovery to new highs.

Therefore, while I am open to adding new silver miners to my portfolio, I believe patience is the best move. As long as the bears can defend $27.80/oz to $28.00/oz on a weekly close, there’s no reason to think this correction is entirely over just yet.

Disclosure: I am long PAAS, GLGDF

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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ETF BASIC NEWS August 18, 2020 10:21am

Crude Oil Steady- The Odds Still Favor the Upside

NYSE:USO August 18, 2020 9:36am

Natural Gas Continues to Climb

  • Seasonality says it is still too early for a significant rally

  • The weekly chart looks more constructive than the daily

  • Another opportunity to buy on a dip could be coming soon- Look for a higher low

After trading down to a low of $1.583 on June 26, natural gas made a higher low at $1.646 on July 20. The constructive trading pattern gave way to a rally that took the price of the nearby September futures to a high of $2.379 per MMBtu on August 14. The price settled at $2.356 at the end of last week, just near the high.

Natural gas can be one of the most volatile commodities that trade on the futures exchange.

Since the NYMEX introduced futures on the energy product, the price has traded from a low of $1.02 to a high of $15.65 per MMBtu. With the 2020/2021 winter season approaches, the price bias tends to be on the upside. The time of the year when inventories decline begins in November, but stockpiles are significantly above last year’s level and the five-year average, which could prevent any significant rally.

In November 2019, the price rose to a high of $2.905 before falling to the lowest price in a quarter of a century in June when natural gas fell to $1.432 per MMBtu on the continuous futures contract.

The United States Natural Gas Fund (UNG) moves higher and lower with the price of NYMEX futures.

Seasonality says it is still too early for a significant rally

The EIA reported a slightly higher than expected injection into storage for the week ending on August 7.

The market projections were for a 40 billion cubic feet build, but the inventories rose by 58 bcf. The price of natural gas drifted slightly lower in the aftermath of the report but remained above the $2 per MMBtu level.

As we are now in the middle of August, there are still more than three months to go before the beginning of the withdrawal season in the natural gas market in the United States.

Inventories are likely to be at the highest level in years. In November 2019, stockpiles peaked at 3.732 trillion cubic feet.

We will only need to see an average increase of a little under 29 bcf to reach last year’s level.

A move to over four trillion cubic feet requires an average build of less than 48 bcf. The level of stockpiles and seasonality in mid-August tells us that it is still early for any upside fireworks in the natural gas futures market on NYMEX.

The weekly chart looks more constructive than the daily

At the $2.35 level at the end of last week, natural gas could be heading for a test of the early May peak.

Source: CQG

The daily chart shows that the latest high at $2.379 on August 14 was below the early May peak at $2.499 on the September futures contract. Price momentum and relative strength indicators were in overbought territory.

Open interest, the total number of open long and short positions in the natural gas futures market at 1.253 million contracts at the end of last week, had been drifting lower since June. The lower level of risk positions is a sign that speculators and hedgers are not rushing into the natural gas market in mid-August.

Instead, they have been closing long and short exposures over the recent weeks. The daily chart looks like the price could run out of upside steam.

Source: CQG

Meanwhile, the longer-term weekly chart looks a bit more favorable for the price prospects of natural gas. The continuous contract has made higher lows since June after hitting the quarter-of-a-century low of $1.432 per MMBtu. Natural gas hit a higher low of $1.558 in July and $1.605 per MMBtu later that same month, which was the most recent weekly low.

Meanwhile, natural gas rose to a high of $2.379 in mid-August, which surpassed the early May high and the first level of technical resistance at $2.162. Higher lows and higher highs on the weekly chart are a constructive sign for the energy commodity. Natural gas traded to its highest price in 2020 last week and since early December 2019.

Another opportunity to buy on a dip could be coming soon- Look for a higher low

It may be too early for natural gas to make a substantial move to the upside. The high level of stockpiles, which are significantly above last year’s level and the five-year average, are a factor that should continue to limit rallies in the energy commodity.

November is still over three months away, so any seasonal buying is not likely to appear in the natural gas market for at least the next month. Finally, the trading pattern over the past years has been bearish, and speculative shorts have had plenty of success selling on rallies and pushing the price lower.

Therefore, we should see another period of price weakness that takes the price below the $2 level. I am looking for another higher low above the $1.605 level on the weekly chart, and over $1.781 on the active month September futures. I will be a scale down buyer below the $2 level on the next dip to get ready for a seasonal rally this fall.

However, the high level of inventories could keep the price below the November 2019 high at $2.905, which stands as the critical level of technical resistance in the natural gas futures market going into the winter of 2020/2021.

Warren Buffett gave the natural gas market a vote of confidence with his purchase of Dominion Energy’s (D) transmission and pipeline assets. The price has moved higher since the announcement of the investment. We are still in the heart of the summer season where stocks are building for the coming peak season. The odds continue to favor another correction, but the recent trend has been higher.

I will continue to approach the market with tight stops. Small losses as the price move higher could give way to a profitable opportunity on the downside if the natural gas market decides to take another elevator ride lower.

ETF BASIC NEWS August 17, 2020 9:54am

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