Don’t Short A Dull Market? There’s Nothing Duller Than Crude Oil

Crude oil closed at its highest level since July 2015 yesterday. This is obviously a positive, but is it a valid breakout and will higher prices be around the corner? We dove into the fundamentals, issues, and policies surrounding this important commodity in our latest Weekly Economic Commentary, but today we will take a look purely at the technical backdrop on crude oil.

First things first: The technical backdrop on crude oil is and has been bullish for quite some time. As the chart below shows, crude oil has completed a bullish inverse head-and-shoulders pattern, and as long as it stays above $50/barrel, this suggests potentially much higher prices. Remember, a head-and-shoulders pattern is a popular technical analysis pattern that forms at the end of major market moves and suggests the overall trend is changing. Given crude oil just had one of its worst bear markets ever, this is another step to a recovery and higher prices.

022217-fig1

The other point that caught our attention is how rangebound crude has been. Per Ryan Detrick, Senior Market Strategist, “For weeks now, it seems like crude has closed around either $52 or $53/barrel, and that is because it has. In fact, the past nine weeks have been one of the tightest ranges in crude oil ever. The old saying is ‘don’t short a dull market.’ Well, there isn’t much out there more dull than crude oil right now.”

Think about this: Crude oil hasn’t closed up or down 2% for 13 straight days, the longest such streak since June 2015. Then over the past nine weeks, crude oil traded in a range of just under 9%. This has only happened 6% of the time historically, and the last time it took place was July 2014, right ahead of the 75% drop in the following 19 months into the February 2016 lows. The good news is the two times before July 2014 when we saw a similar tight range, the prices were higher a year later. In December 2012 and November 1995, crude oil traded in a similar tight range as now and was up a year later 11% and 33%, respectively.

022217-fig2

There is no doubt that the technicals on crude oil remain firmly bullish, but the other side to the analysis shows there is no question that untapped U.S. supply could put a cap on any major rallies. We aren’t bearish on crude oil here and overall think a move higher is possible, but it will likely be capped near $60-$65/barrel. We will continue to monitor this important asset class should anything change.

 

IMPORTANT DISCLOSURES

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.

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

This research material has been prepared by LPL Financial LLC.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Selling short can result in losses should the borrowed security increase in price, rather than decline. The theoretical potential loss is unlimited. Additionally, short sales will incur interest on the borrowed shares while also being subject to margin calls, or early sales in the event that the original owner wishes to sell their position.

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 # 1-584104 (Exp. 2/18)