Friday, August 12, 2005
Issue Contents:
| 09:49 | Swing Trade Setups Featured charts for Friday August 12 |
| 11:52 | Oil Supply and Demand A picture is worth a thousand words |
| 16:15 | TrendVue Trader Talk Today's transcript. |
| 22:45 | Swing Scanner Results Friday August 12 closing data |
| 22:50 | Market Statistics For Friday August 12, 2005 |
Featured setups from Thursday August 11, 2005 closing data symbol scan
Jump to: Long Setups | Short Setups
Notes for the Day
- Initial reaction to the trade data (and DELL) has been somewhat muted… lets see what the day brings
- During the day I shall be posting a big picture work up on all the major markets, a road map for the next week, as best as can be pictured as of today.
Long Setups
General common strategy: Unless noted otherwise, buy stop just above the “high” value, with an initial protective stop at the low value of the bar, not below the bar.
Retracement or Pause in Up Swing / Up Trend
MRK – following up on yesterday’s swing trade thought on the drug sector
LOW – and HD – home improvement. Note its bouncing to overhead resistance, exersize caution!
BBBY – home products
BDX – health/medical
Test of Top – Continuation
BNR – railway – already has had a good run – one to watch in the future even if it doesn’t move up today.
Short Setups
General common strategy: Unless noted otherwise, place a sell alert at or just below the low of the setup bar, and look for the first failed intraday bounce after the low has been broken. What we are looking for is price to push down, bounce a little, and fail again – this is where we want to get short.
Retracement or Pause in Down Swing / Down Trend
YELL – follow up from yesterday
CCMP – follow up from yesterday.
Test of Bottom – Continuation
L – media
As I prepare for a short five-day holiday, allow me a little rant here, please, and at the end we’ll get back to the investment angle. In an article Thursday, Oil surges to $66 a barrel, I spotted this keen graphic.
As usual, the chart tells a better story than most of the words.
“The presence of significant headline risk, most particularly from Iran’s international relations, the Atlantic hurricane season and from tightness in refining, is continuing to support prices at higher levels,” said Barclays Capital.
We keep being told that tight refining capacity is dragging oil up along with refined products, but in the long run that makes no sense. If refinery capacity is the limiting bottle neck, eventually 100% of that capacity gets used up and then oil demand becomes completely stagnant – at least in the US – which should drive down crude prices.
Some price affinity between crude and the various derivative products is of course expected, but not all the way up from $42!
The simple reality is that the supply-demand relationship has been walking along a knife edge for some time, but this doesn’t get talked about much on the street. The balance hasn’t been quite tight enough to cause panic, but its close enough that rounding errors can send the market into a fit.
Tight supply and overall capacity constraints is not a new development. Some oil industry execs have been voicing concern for some time. CEO of Talisman Energy (TLM | Yahoo!), Dr. Jim Buckee:
“Those who believe that abundant deposits are waiting to be discovered are misguided, said Mr. Buckee, who holds a Ph.D. in astrophysics from Oxford University. “There is precious little in the world now that isn’t known about or hasn’t been tried,” he said. “I don’t think there is going to be any new Middle Easts or Saudis hanging around. There aren’t many unexplored basins.”
Dr. Buckee has been quoted here on Trendvue’s pages before.. When last I touched upon his candor back in May (how many oil execs are suggesting that conservation and energy efficiency are important), I’d just let loose in a rant in response to a particularly dumb comment from the White House press spokesman.
An Energy Bill Everyone Hates
Never wanting to be seen doing nothing, governments around the world (at least in net oil importing countries) have been acting. In the developing world, which is hit harder, and sooner, by high energy prices, we’ve seen energy rationing, government subsidies, and a call from government to their citizens to conserve.
In the western world, we don’t think that way. Supply problems are merely challenges at which money and technology should be thrown at. We are, in my opinion, too much a slave to our consumerism to the point that I fear we’ll be blind to serious energy supply problems until its too late to do anything meaningful about them.
In response to an increasingly agitated gasoline buying public, Congress sent an energy bill to the President that offers no real conservation incentives nor even suggests that conservation is necessary, and no one, not even staunch fans of the administration, seem to like the bill other than the politicians that authored it. But corn farmers will, and they’ll thank their representatives and senators to be sure.
- The libertarian Cato Institute (Energy Bill Follies) called aspects of the bill obnoxious.
- Labelling the bill as “full of pork”, The Heritage Foundation (The Bad Tax Bill Within the Bad Energy Bill), a conservative think-tank and policy advocacy group, lambasted the new policy as a bunch of “old ideas that never worked and new ideas that are unlikely to work”.
- The Sierra Club, as one might expect, found nothing to like in the measure, but at least offers an interesting collection of statistics (America needs a safer, cleaner, and more secure energy future) which help frame the debate, and fires this shot across Capitol Hill’s bow:
“If Congress believes that this bill will lower gas prices or cut America’s oil dependence, then the heat wave must be affecting their judgement.
- Democrat Dennis Kuchinich (D-OH) is promoting a bill called the Gas Price Spike Act of 2005.
While his concern for constituents and the economy is admirable, apparently Mr. Kuchinich doesn’t understand supply and demand very well. Slapping so-called windfall profits taxes on oil and gas companies will only hinder their ability to find more oil and gas and thus make prices go up in the future. Brilliant! In some ways, Ayn Rand had it just right.
Outlook Depends On Perspective
Whether the energy bill or any measure simply designed to increase production hits the mark or not depends on one’s perspective as to whether price is influenced today by short term factors that can be resolved with more technology and drilling, or whether there is a more fundamental problem – one of scarcity in the not distant future – facing the world.
There are two schools of thought camped out here: those that believe oil production will one day peak, and those that believe new technology will keep the oil gravy train running almost forever. Most of Wall Street hangs out in the second camp, because its what they grew up with, and because this group rides in nice cars and the street loves cars.
I last wrote about the concept of Peak Oil back in May. The theory is based on observations of past history and is simply this: an ultimate limit to the amount of oil that can be produced on a daily basis will be hit in our lifetimes. Peak Oil proponents are not suggesting the end of oil, merely the end of ever increasing oil production. For a world economic system completely based on ever increasing amounts of relatively cheap energy, the latter outcome is almost but not quite as bad as the former.
Peak Oil theorists are in good company – even the US Department of Energy believes in this theory, but their forecast date for an oil production peak, or undulating plateau, is 25 years out into the decade of 2030.
The more pessimistic of Peak Oil theory proponents believe the peak is much closer than that, perhaps as near as now or next year. Perhaps current prices are an indicator they are on to something.
The other camp believes that there are ample supplies – more than enough to meet the needs of all users – nothing to worry about and renewed investment will fix all. Cambridge Energy Research Associates falls into that group of wide-eyed optimists. If you’ve got a spare couple of thousand, you can drop it on CERA’s report Oil & Liquids Capacity to Outstrip Demand Until At Least 2010, but you can get the gist of their conclusions by reading the press release and a free bit of marketing they got in the July 31 edition of the Washington Post (It’s Not the End of the Oil Age).
Within the ever-hopeful group there’s a much smaller band of super-optimists that include followers of one scientist, Thomas Gold, who developed a theory called the Abiotic Theory of Oil Formation.
Abiotic oil theorists believe that oil is an unlimited resource, somehow regenerating itself below the earths surface. No credible science today lends support to their theories, and even if in the end there is a grain of truth to their beliefs, practicality may trump theory as field output declines all over the world are a certain fact.
The United States oil production peak was in the 1970’s and its been a net importer of oil ever since. Indonesia, an OPEC member—you know who they are, they are the Organization of Petroleum Exporting Countries (!!)—, just this past month became a net oil importer. If abiotic oil formation is real, it happens at a rate not useful to us mortals with our quarter to quarter market fixation and gas tanks to fill.
What does The Street think? With high prices awakening interest in all things energy related, its no surprise that the calls for a peak this year or next are starting to build, but interestingly the scenario has yet to achieve wide spread interest or coverage.
As near as I can tell, much of Wall Street either has no knowledge of Peak Oil, or dismisses the notion as quackery, secure in the belief that markets will provide, as they always do. Economists tend to believe that market forces will eventually adapt to imbalances and disruptions, and they’ve got hundreds of years of economic theory to back up their views. Yet sometimes disruptions and imbalances translate into real pain that lasts years or decades. Economic theory doesn’t fill gas tanks in the short term, even if they end up being right in the long run.
No mainstream economist I’m aware of seems alert to the potential for near-term peak oil production being a reality, which tells us that markets have not at all discounted the impact of such an event.
What do I think? There’s no way to come to firm conclusion on Peak Oil. The unanswerable question – how much oil and capacity and ability to ramp up output does Saudi Arabia really have – would need to be answered in order to come to a sane and thoughtful conclusion, much less figure out the timing of a Peak Oil event.
Without hard data I have to rely on price charts and a basic fundamental understanding of the energy markets. I don’t over-think the problem, so my investment plan is very simple: While energy markets are strong, I am long but more importantly long and overweight in the group, holding a set of core positions and using trading positions to gain extra traction out of the trend while it lasts.
In my trading positions I take profits frequently when it makes sense to do so. I stalk intraday dips and buy them. I trade the long side only and if a short setup appears I use that as cue to move up stops or take profits. In short its a very simple strategy and highly effective in a strong trend. When the trend reverses, all such activity will stop.
Is The Energy Bill Missing The Point?
Both the energy bill and its primary critics (leaving out perpetually anti-oil environmental groups) miss the important point. The world’s addition to petroleum is at record levels and the industry is having a difficult time keeping up to demand. Many non-OPEC countries produced less oil in the past twelve months than in the year prior. That doesn’t make any sense… in a record high price environment, every producer should be pumping out every last drop of oil and increasing production to maximize profit while they can. If they can.
If, indeed, they can, is the point that the Peak Oil camp wants to draw our attention to -if not for now for that time within our lifetime when oil production world wide really does peak.
If one believes that a peak is around the corner, such as the five year timeframe that CERA, ironically an energy optimist, paints, its not nearly enough time to migrate to alternatives.
Unfortunately, except for oblique references to efficiency and pandering to the automobile industry (and the jobs/votes implied therein), neither the Energy Bill or policy makers are making serious noises about conservation and demand reduction. This may prove to be dangerously short-sighted.
If non-OPEC producers can’t ramp up production to keep pace with demand (they aren’t and can’t), then like it or not, OPEC rules. Given that it takes years to bring on new production areas, and very few major oil fields have been discovered in the past 20 years, continued supply/demand crunches can be avoided only if one side of the balance tips:
- Supply: IF Saudi Arabia can quickly bring on 1 – 2 million barrels a day in addition to what they are already pumping, each and every year, or,
- Demand: IF world-wide demand growth slows dramatically, implying recession or worse.
To date, more supply has always been the answer. Over the past 24 months, the world appears – and I stress appears, as so little is actually known about most of OPEC’s production – to be running into a supply crunch of historic proportions.
I’m a trader and could care less about prices heading higher or lower, as a return can be earned regardless of direction. However, a real supply crunch – not one artificially manufactured like the OPEC embargo of decades ago – would be simply devastating to world economies and affect us all as individuals.
Whether Saudi Arabia can open the taps and pump that much extra (without damaging their oil fields) is a big unknown. Usually you can tell a lot about an organization by matching what they say with what they do. OPEC continues to state to all who will listen that, in their opinion, current high prices are completely irrational. Numerous times they’ve indicated that they are prepared to act decisively to correct what they call unreasonably high prices.
Yet OPEC have done nothing of material substance to change the situation. Dumping another 1 – 2 million /bbl per day into the system would do it. OPEC recently reported they had increased production – across all OPEC member states – of only 300 thousand barrels.
Either they are enjoying the high prices too much to do anything about it, or they don’t have the ability to do anything about it. We can live with profiteering, but we can’t live, easily, with a big supply crunch.
That, it seems to me, is the core question and as its unanswerable by anyone but the Saudi regime—and they are not talking—prices are going to remain high until supply or demand very visibly win or lose the battle at hand.
The Current Investment Angle
Back in mid-May we started pursuing the sector aggressively and have been ever since, but lets be realistic – nothing goes up forever in a straight line.
$XOI – Amex Oil Index : We’ve come a long way, baby
Energy has had a huge run and even though the commodity, as I write this, continues to rise, professionals know they need to ring the register once in a while and take profits, merely because price has risen so much, in such a short period of time, with very few pauses. Eventually a sector or market runs out of buyers, and then a big dip is the result.
Crude, Natural Gas
These charts, especially natural gas, which gets so little space in the headlines each day (just wait until winter…), are already long in the tooth and NG is positively parabolic. Any stumble will bring a tumble to the commodity and related sector.
Pursuing energy names with a strong trend in place is what we want to do, but when markets start going parabolic, as this one is, we know that the potential for a sharp - and often very sudden - reversal is increasing every day the sector moves higher.
In 2000 and 2001 it was easy to find over-inflated tech stocks to sell - most of them had parabolic charts far steeper than we see in today’s energy sector, and many of them made nothing tangible and a surprising number made no profits, ever. Energy has its cycles to be sure, but its a commodity which the world simply can not do without. Therefore, while parabolic rises without pause do concern me, I will be a future abeit cautious buyer of any reasonable retracement that shows up in energy as the fundamental picture for energy is quite unlike the fundamental picture in 2000 for shopping on EBAY or talking on a MOT cell phone or various over-capitalized internet stocks with no real plan.
The bottom line: Emotions in the energy market are running very high, and crude oil is travelling in uncharted territory. We could see a substantial pull back in the sector of 5 – 10% appear at any time. Look for opportunity if such an event should show up, but do exercise as much caution then as now. The market is littered with the corpses of investors who believe that this time its different. The peak oil folks are likely to proven correct, one day, but we won't through out all of our rules which so ably protect us in the hope that this time it is different.
Today's transcript.
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Friday August 12 closing data
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Statistics for Friday August 12, 2005
Our custom symbol universe of the most heavily traded or liquid US stocks is used as the base for analysis.
| Symbols in Up Swings | 296 |
|---|---|
| Symbols in Down Swings | 388 |
| Up/Down Swing Ratio | 0.76 : 1 |
| Advancers | 29% |
| Decliners | 69% |
| Unchanged | 1% |
| Up Bars | 25% |
| Down Bars | 47% |
| Inside Bars | 16% |
| Outside Bars | 6% |
| Close > 20EMA | 29% |
| Close > 50SMA | 61% |
| Close > 200SMA | 66% |
| 20EMA > 50SMA > 200SMA (trend up) | 46% |
| 20EMA < 50SMA < 200SMA (trend down) | 19% |