Off the Charts: Crude oil under pressure

Key Concepts

• Demark Indicators: A technical analysis tool used to identify potential turning points in price trends, specifically a “counter-trend signal” indicating potential stabilization.
• 50-Day Moving Average: A technical indicator representing the average closing price of an asset over the past 50 days, used to identify trends.
• WTI (West Texas Intermediate): A benchmark crude oil grade used in pricing.
• Base Breakout: A technical pattern indicating a potential reversal of a long-term downtrend.
• Cyclical Down Move (Basin Phase): A temporary decline within a larger, ongoing uptrend.
• Secular Uptrend: A long-term, sustained upward trend.
• Relative Performance: Comparing the performance of one sector or stock to another, or to a broader market index.

Crude Oil Outlook & Energy Sector Analysis

The analysis focuses on a potential turnaround in crude oil prices (WTI) and identifies specific energy stocks poised to benefit. A key development is the appearance of a counter-trend signal on Demark Indicators, suggesting a period of stabilization – potentially up to nine weeks. This stabilization is expected to facilitate a move above the $59 per barrel 50-day moving average. Katie Stockton emphasizes this breakout wouldn’t require a significant price increase and could occur rapidly, within days or weeks.

Crude Oil Price Targets & Support Levels

The primary target price for WTI, should the breakout occur, is $68 per barrel over the intermediate term. Crucially, the analysis highlights strong support around the $55 per barrel level. Maintaining this support, alongside the active counter-trend signal, is considered essential for the bullish outlook. The expectation is that breaching the $59 level will act as a positive catalyst, generating further momentum for both crude oil and related stocks.

Sector Rotation & Relative Strength

While the energy sector’s overall relative performance hasn’t been strong, there’s been observed rotation within the sector, with individual stocks showing intermediate-term upside momentum while technology and other sectors are losing momentum. This divergence is significant, suggesting the energy sector could perform well even if the broader market weakens. Stockton notes the energy sector often behaves differently than the broader market, making it a potentially attractive option for investors anticipating market slowdown.

Specific Stock Recommendations

Two stocks are specifically highlighted as potential beneficiaries of a crude oil price increase:

• SLB (Schlumberger): SLB is exhibiting a long-term turnaround, evidenced by a base breakout following a prolonged downtrend. The current pullback within the sector is viewed as a potential buying opportunity, aligning support levels with previously cleared resistance levels. This suggests a favorable entry point is approaching.
• TRP (Targa Resources): TRP is characterized by a continuing secular uptrend. Within this uptrend, a cyclical down move (identified as a “basin phase”) occurred, followed by a breakout. The former resistance level is now expected to act as a target price.

Technical Analysis Framework

The analysis relies heavily on technical analysis, specifically utilizing Demark Indicators and identifying key price levels (support and resistance) and chart patterns (base breakouts, secular uptrends, cyclical down moves). The emphasis is on identifying turning points and momentum shifts through price action and indicator signals. The concept of a “basin phase” is used to describe a temporary dip within a larger uptrend, offering a specific context for identifying potential buying opportunities.

Notable Quote

“We have a long term turnaround that appears to be underway for that [SLB] chart. So SLB has a base breakout following a long term downtrend. And I think that acts as a catalyst.” – Katie Stockton, regarding the potential of Schlumberger stock.

Logical Connections

The analysis establishes a clear connection between crude oil price movements and the performance of energy stocks. The counter-trend signal in crude oil is presented as a catalyst for a potential breakout, which in turn is expected to drive positive momentum in the energy sector. The specific stock recommendations are directly linked to their respective chart patterns and their potential to benefit from a rising oil price environment. The observation of sector rotation further reinforces the idea that energy stocks are poised for outperformance.

Conclusion

The core takeaway is a cautiously optimistic outlook for crude oil and select energy stocks. The appearance of a Demark counter-trend signal, coupled with strong support levels and observed sector rotation, suggests a potential turnaround is underway. Investors are advised to monitor the $59 per barrel level for WTI and to consider SLB and TRP as potential investment opportunities, particularly during the current sector pullback. The analysis emphasizes a technical approach, focusing on price action and indicator signals to identify potential entry points and profit targets.