A Golden Opportunity for Crude Oil?

Crude oil has seen a record bounce in the past three months going back to the lows hit in February, on the heels of the worst bear market ever—but what could be next? Technically, things continue to look good, and on Monday there was potentially a very bullish technical development called a golden cross. A golden cross occurs when the faster moving 50-day moving average crosses above the slower moving 200-day moving average. This is widely considered to be a bullish technical development, while the inverse is known as a death cross (when the 50-day crosses below the 200-day).

051316_Blog_Figure1

This is the 24th golden cross for crude oil going back to 1983. Three months later, the average return is a solid 4.2%, but it then drops to 2.5% six months later, before a jump to 9.2% a year later. Going out further, two years later the average drops to 6.2%, with a flat median return. Nonetheless, the average return a year later for crude is 6.4%; thus, returns one year after a golden cross have been stronger than average.

051316_Blog_Figure2

Now here’s where things get interesting. This was the longest bear market ever for crude. In fact, crude’s 50-day moving average was beneath its 200-day moving average for 422 straight days—surpassing the previous record of 367 days in 1993/1994. Do things change after a golden cross when crude has been in an extended bear market? It sure looks like it. As shown in the table below, there have been three other times crude went more than 300 days without a golden cross and the returns after are very strong. Although there are only three instances, a return of 26% a year later—and positive for all three—is worth noting.

051316_Blog_Figure3

Crude (and the energy group overall) is one area we continue to think could potentially provide nice gains in the second half of the year, and this study helps confirm this idea.

 

IMPORTANT DISCLOSURES
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.

Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with fundamental analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor
Member FINRA/SIPC
Tracking # 1-497562 (Exp. 05/17)