Crude oil is turning down sharply down after making a new high that has been expected for a completed five wave cycle in wave c. Further weakness through 75.62 will be bearish for crude that could then revisit 73.25 lows next week.

CRUDE OIL (January 2015) 1h Elliott Wave Analysis

GOLD is at the highs following the pattern from start of November when metals broke higher each Friday. Well, we see price at the highs, but this time rally can be different and much smaller as we see prices in wave (v), final leg of a larger five wave recovery. In fact, we see breakout from a triangle, so it’s the final trust, therefore upside can be limited around 1210-1215.

GOLD 1h Elliott Wave Analysis

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Angelos Damaskos, principal adviser of the Junior Oils Trust, admits that he finds the recent collapse in oil price a mystery. Nonetheless, he has no doubt that demand will compel higher prices in the medium and long term. In this interview with The Energy Report, Damaskos argues that current prices are dismal news for the majors, shale oil producers and the oil sands but underline the advantage of investment in juniors with solid, long-term projects, of which he presents five.

Oil has hit a slick recently with price sliding over 30% in the last five months. There are now calls for price to potentially test the 2009 lows. While I think this is a bit extreme, let’s investigate the charts to see what the evidence there suggests.

We can see price declining from the June 2014 high at US$107.73. This was your stock standard, run-of-the-mill downtrend. Steady as she goes. Then towards the end of September, price ramped up the velocity of the downtrend and price started to fall at a much faster rate. This can be seen in the green highlighted circle.

I have drawn a horizontal line which denotes the swing low in September. We can see in the green highlighted circle that price initially found support at this level before trading back up and making a double top. This was a bearish double top as it was with the trend.

This double top has led to a steep decline that took out the previous swing low and the downtrend then began to accelerate. This is demonstrated by the black downtrend line I have drawn. This trend line initially held the lows of the downtrend. Then when price accelerated to the south side this same trend line held the highs of the downtrend.

Now what is important about this development is that when this happens it usually means the end of the current downtrend is nearing. So what other evidence is there of the downtrend ending?

A common bottoming pattern is three consecutive lower lows. I like to call this the “three strikes and you’re out” low formation and this looks to already be in place now.

Price hit a low of US$73.25 on the 14th November and I suspect that is the end of this current downtrend. Keep in mind, after any rally the overall trend may continue further south.

This third and potentially final low looks to be accompanied a triple bullish divergence in both the Relative Strength Indicator (RSI) and the Moving Average Convergence Divergence (MACD) indicator. This generally leads to a significant rally.

So assuming we get a rally from here, how high could we expect price to rally?

I have added Fibonacci retracement levels of the move down from June 2014 high to the recent low. In these instances, price often rallies back to where the downside acceleration began. The September swing low is around the 50% level at US$90.49 while the double top is around the 61.8% level at US$94.56. I favour price rallying back to one of these levels with a preference for the latter.

Let’s now look at the bigger picture using the monthly and yearly charts as shown in the recent November newsletter.

We can see price has traded in a tight range for the last few years. The high of the range was set in 2011 at US$114.83 while the low of the range was set the same year at US$74.95. This recent move down is the first time price has traded outside of this range.

I have drawn two black uptrending lines from the 2010 low and the 2011 low. Price recently broke down through these trend lines which saw the downtrend accelerate.

While price has marginally broken the 2011 low, I suspect price may find support here and essentially form a double bottom with the 2011 low. This would get the traders in that play the reaction higher. Perhaps they can push price back up to the first black trend line which would be somewhere between the 50% and 61.8% Fibonacci levels as shown in the daily analysis.

However, considering the double bottom is against the trend, price should then turn back down and bust through this support level.

So where could we expect price to finally make a solid low?

I have drawn an Andrew’s Pitchfork which shows price has mostly been trading in the lower channel albeit closer to the middle band. I suspect price is now headed down to test the lower band of this pitchfork. And it is here where I expect the final pullback low to form. Price testing this lower pitchfork trend line in the second quarter of 2015 looks to be slightly under the US$70 mark.

Also, the 2010 low at US$64.24 should be solid support and I doubt price will trade below this level. Price breaking below this level would likely nullify this analysis.

So, I am looking for the final pullback low to be around the US$67-US$68 level. This can be seen in the yellow highlighted circle.

The lower indicators, the RSI and Stochastic indicator, are both showing very oversold readings so a rally now would help to relieve some of this negativity. Then perhaps the next move to final lows will be accompanied by bullish divergences in these indicators. Let’s see.

And once the final pullback low is in place, perhaps we could expect a move up to new rally highs and into the higher pitchfork channel.

This is from the November newsletter and nothing has changed .

We can see the two candles of the years 2008 and 2009 provided a massive trading range. The high in 2008 was US$147.27 while the low in 2009 was US$32.70. A lot of money was won and lost in those two years!

The Parabolic Stop and Reverse (PSAR) indicator has a bearish bias and has provided solid resistance to price in recent years. If price were truly in a big bear trend then this resistance could be expected to hold. But to my eye, the chart does not look like a bear market. At worst, it looks like a big consolidating market. At best, a massive bull market with the 2009 low being a higher low.

With that in mind, it is normal for price to initially be rejected by the PSAR resistance. But then the charade ceases and price reverses back up to bust the dots.

I have drawn voodoo style the candle for 2015 as I expect to see it. It shows the wick making new yearly lows and testing the 2010 low before reversing higher and finishing the year well and truly in positive territory. And busting the PSAR dots in the process. Let’s see.

The Moving Average Convergence Divergence (MACD) still has a bullish bias with the blue line above the red line and even though the averages appear to be moving closer together there is still plenty of time for price to take advantage of this bullishness.

And as for oil testing its 2009 lows, as far as I’m concerned, the Soprano’s Paulie Gualtieri says it best – “Forget about it”.

As surprising as it might sound today, we believe the secular trend for commodities has higher elevations to travel, before eventually running its course – possibly as far out as early into the next decade. While in 2011 we became adamant that the thesis trade in commodities – specifically in its leading sector of precious metals, had become crowded and overhyped, those excesses have been wrung out of the markets over the past three and a half years and offer what we perceive to be extremely compelling long-term valuations going forward. 

This idea remains supported by our research that implies yields are not headed materially higher anytime soon – despite the anxieties surrounding the Fed raising interest rates over the next few years. Moreover, we expect that real yields (nominal – inflation) will remain suppressed and eventually retrace the rise that began in the back half of 2011. When the real yield cycle finds its zero bound and breaks below, commodities tend to outperform in the market over an extended period of time. All things considered, the death knell spike in real yields that has historically punctuated the end of major commodity booms in the past – has yet to appear for us on the horizon. 

Over the years we have shown a long-term Hawking view of the nominal yield cosmos, which depicts an antithetic and gradual troughing, versus the violent and exhaustive secular peak in yields the markets experienced in the early 1980’s. While 10-year yields this year have retraced back to the mid point of our

expected range (1.5%-3.0%), taking into account the symmetrical structure and mirrored return of the long-term yield cycle,  an estimated secular pivot higher would not take place until early in the next decade. 

When it comes to a roadmap for short-term yields going forward, we looked back at the last time 3 month Treasury yields broke below 0.5% in 1934 and troughed over the next 13 years until 1947. Notwithstanding the failed rate hike regime by the Fed in 1937, the current market has closely followed the historic comparative performance trajectory of that time. Interestingly, by normalizing a duration study to that period (see below), the estimated run below 0.5% would also extend early into the next decade. 

From our perspective, the broader cycle takeaways are:

• Although the Fed may tweak short-term yields gradually higher at some point in the future, the expectations by participants of a one – and certainly two or three handle, in front of the fed funds rate – appear wildly optimistic over the next few years.
• We believe the extended and gradual basing structure of the historic cycle reflects more realistic expectations for yields and the natural equilibrium that the Fed will ultimately be guided and constrained by – just as they were across the trough of the cycle last time around. 

As shown in our first chart that depicts both the long-term nominal and real yield cycles, commodities have outperformed along runs leading up to the nominal peak in yields and through the nominal trough of the cycle. From a comparative perspective, the 1970’s commodity boom that ran commensurate with the yield peak was roughly half the duration of the commodity boom that ran through the trough in the 1930’s and into the early 1950’s. This makes logical sense to us, considering what we know of the nominal yield cycles structure – i.e. shorter exhaustive highs versus long drawn out troughs.

When comparing the performance of the CRB index between the 1970’s supercycle and today, you might come to the initial conclusion that the current cycle hasn’t been that super after all. In fact, the current cycle (as expressed by the CRB) would roughly fit within the performance envelope of the first leg of the 1970’s market (71′-78′) – despite being more than twice as long. Complicating the tea leaves of the current market was the major currency dislocations in the financial crisis, which caused an overshot on both the top and bottom sides of the performance ranges. 

While the recent prognostications of $700/ounce gold and $50/barrel oil make for great hyperbole by the bears and in the punditsphere, we view them as the typical overshots that are thrown around during the final throes of capitulation. In as much as markets tend to overshoot significant moves, expectations soon follow – always in the same direction of where a market has been trending. With commodities remaining under pressure since Q2 2011, recency biases have entrenched towards further downside in the future. For gold to reach $700/ounce or oil $50/barrel, real yields would be pushed significantly higher – essentially repeating the performance declines for both assets that began in 2011. From what our anticipated range implies for nominal yields over the next few years and how eroded inflation expectations have become today, both targets appear grossly unrealistic. Contrary to conventional wisdom in the market today, we still believe hard commodities such as gold and oil will once again outperform – greatly supported by the tangential performance trends in catalysts such as China and emerging markets. 

You’ll find that for many of the commodity cycle bears today, their theses hinge on a continued catalytic decline in China. This is predominantly because China had played such a pivotal role through the first boom of the commodity cycle in the massive demand created by significant investments in infrastructure and urban development. While the excesses in China have been well described and rigorously debated for the better part of this decade, the just how bad the crash will beexpectations by the policy bears have so far been largely unfounded. 

Quite the contrary, although these concerns remain at the forefront of debate as growth in China has slowed, the leading edge in their equity markets have surprised (finally) many this year – and broken out from a 5 year consolidating range. 

As much as their arguments are well founded with cogent logic, the reality becomes that  increased capital flows and resurrected confidence in Chinese markets will have a mitigating effect on the immanent credit conditions that academics and strategists such as Paul Krugman and Michael Pettis have been greatly concerned with over the past several years – and whom largely expected significant pressures to remain on the commodity markets as China would be forced into a long and painful economic rebalancing. 

While it remains to be seen weather China has its comparative 82′ awakening (see above) or its much anticipated bust, we do believe the recent positive developments in their capital markets will provide a constructive rather than destructive environment for the commodity sector over the next year. All things considered, we’ll still take that bet and doubt we will ever see $700 gold or $50 oil again in our lifetime. From our perspective, $1400 and $100 appear more likely in 2015 – and by 2022… who knows – the super may have shown up again in this cycle. 

http://www.marketanthropology.com/

West Texas Intermediate (WTI) oil for December delivery is currently priced at $75 per barrel, Brent for January delivery at $78 per barrel. Many investors, publications and news sources focus only on the drawbacks to falling oil and gas prices–don’t get me wrong, there are many–but today we’re going to give the spotlight to the biggest winners and beneficiaries.

Starting with your pocketbook.

Oil has slipped 30 percent since July, but the only place in the world where retail gas has fallen as much is Iran. In most countries, gas is down between 10 and 15 percent. Here in the U.S., ground zero of the recent energy boom, the national average has fallen close to 20 percent. As I said last week, American consumers have been treated to an unexpected tax break because of this slump, just in time for the holiday shopping season.

Three of the main contributors to oil’s decline are the strong U.S. dollar, which has put pressure not only on oil but other commodities as well; geopolitics, specifically tensions with Russia and the Saudis’ currency war; and the acceleration of American oil production. The hydraulic fracturing boom has flooded the market with shale oil, which in turn has driven prices down. As you can see below, there’s a wider spread between 2008 and 2014 oil production levels in the U.S. than in any other oil-producing country shown here.

Which Countries Benefit?

Last month I briefly discussed how low crude prices benefit Asian markets the mostbecause they tend to be net importers of oil and petroleum. On top of that, a large portion of the population in these countries spends a significant amount of their weekly income on gas–in the case of India, as much as 30 percent. The biggest winners, then, are Asian countries such as India, Philippines, Thailand and Indonesia.

China, the world’s largest net importer of oil, second only to the entire continent of Europe, also benefits. For every dollar that the price of oil drops, its economy saves about $2 billion annually. Even though it just signed a multibillion-dollar, multiyear gas supply deal with Russia, China plans on tapping into its own shale gas resources, estimated to be the largest in the world.

One notable exception to the Asian market is Singapore. Although the city-state is a net importer of crude, bringing in around 1.3 million barrels a day, it depends heavily on oil exports to grow its economy. According to Bloomberg, in fact, Singapore ranks second in the world for a reliance on crude, based on a change in oil exports as a percentage of GDP from 1993 to 2018. Only Libya’s economy is more dependent.

Because the United States continues to be a net importer of crude and petroleum–it imports around 6.5 million barrels a day, according to CLSA–it has benefited as well, but its dependence on foreign oil is falling fast.

In the chart below you can see how breakeven prices increase as both global oil demand grows and the geological formation requires more sophisticated–and expensive–extraction methods.

Larger Image

Which Industries and Companies Have Benefited?

To answer this question, Strategic International Securities Research (SISR) ran a correlation coefficient between the retail price of gas and 72 global industry classification standard (GICS) sectors, focusing on the years 2000 through 2014. Below are the top three sectors that ended up benefiting the most from falling gas prices. They all have a negative correlation coefficient, meaning that their performance has historically gone in the opposite direction as the price of gas, similar to a seesaw.

What this data shows is that the U.S. manufacturing industry has regained the cost benefit advantage to Chinese manufacturers. It’s becoming more and more attractive to build and create here in the U.S. because the cost of energy is relatively low.

Leading the list is automakers, suggesting that when gas prices have dropped, consumers have felt more confident purchasing new cars and trucks. Today consumers are even returning to vehicles that are known to guzzle rather than sip gas, such as SUVs, pickup trucks and crossovers. Ford’s F-Series continues to blow away its competition. Since mid-October, General Motors has delivered 7 percent, Ford 11 percent and Tesla, which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX), 12 percent.

It makes sense that airlines would perform better, since fuel is typically their largest single expenditure. In 2012, when the average price of a barrel of oil was $110, fuel accounted for 30 percent of airlines’ annual operating costs. Low fuel costs are cited as the main reason why Virgin America, which went public last week, reported third-quarter profits of $41.6 million, an increase of 24 percent year-over-year. The NYSE Arca Airline Index has flown up 110 percent since the beginning of 2013, hitting 13-year highs, and Morgan Stanley recently took a bullish position toward airline stocks, showing that company balance sheets are “structurally sound enough to make ‘events’ in the next five years unlikely” and that the industry as a whole is now growth-oriented.

It also makes sense that aluminum would benefit, given that the metal requires a notoriously large amount of energy to produce.

SISR highlights a few industries that surprisingly have had a positive correlation coefficient: department stores, apparel retail and luxury goods. You’d think it would be safe to assume that the retail sector benefits when consumers have been given relief from high gas prices. This is certainly the case now: Walmart, a bellwether for general market sentiment, is hitting new highs, and Tiffany & Co., which we own in our Gold and Precious Metals Fund (USERX), is also thriving. But in the past, low oil and gas prices have been reflections of a weak domestic economy. The average price per barrel of crude in 2009 was $62, a sharp decrease of nearly 40 percent from the average in 2008. Today, gas is inexpensive not because the economy is weak but because frackers are simply too good at what they do. They’re victims of their own success. What has hurt them has helped American consumers build more disposable cash flows, which can now be spent on fast food, retail, home improvement and other goods and services.

West Texas Intermediate (WTI) oil for December delivery is currently priced at $75 per barrel, Brent for January delivery at $78 per barrel. Many investors, publications and news sources focus only on the drawbacks to falling oil and gas prices–don’t get me wrong, there are many–but today we’re going to give the spotlight to the biggest winners and beneficiaries.

Starting with your pocketbook.

Oil has slipped 30 percent since July, but the only place in the world where retail gas has fallen as much is Iran. In most countries, gas is down between 10 and 15 percent. Here in the U.S., ground zero of the recent energy boom, the national average has fallen close to 20 percent. As I said last week, American consumers have been treated to an unexpected tax break because of this slump, just in time for the holiday shopping season.

Three of the main contributors to oil’s decline are the strong U.S. dollar, which has put pressure not only on oil but other commodities as well; geopolitics, specifically tensions with Russia and the Saudis’ currency war; and the acceleration of American oil production. The hydraulic fracturing boom has flooded the market with shale oil, which in turn has driven prices down. As you can see below, there’s a wider spread between 2008 and 2014 oil production levels in the U.S. than in any other oil-producing country shown here.

Which Countries Benefit?

Last month I briefly discussed how low crude prices benefit Asian markets the mostbecause they tend to be net importers of oil and petroleum. On top of that, a large portion of the population in these countries spends a significant amount of their weekly income on gas–in the case of India, as much as 30 percent. The biggest winners, then, are Asian countries such as India, Philippines, Thailand and Indonesia.

China, the world’s largest net importer of oil, second only to the entire continent of Europe, also benefits. For every dollar that the price of oil drops, its economy saves about $2 billion annually. Even though it just signed a multibillion-dollar, multiyear gas supply deal with Russia, China plans on tapping into its own shale gas resources, estimated to be the largest in the world.

One notable exception to the Asian market is Singapore. Although the city-state is a net importer of crude, bringing in around 1.3 million barrels a day, it depends heavily on oil exports to grow its economy. According to Bloomberg, in fact, Singapore ranks second in the world for a reliance on crude, based on a change in oil exports as a percentage of GDP from 1993 to 2018. Only Libya’s economy is more dependent.

Because the United States continues to be a net importer of crude and petroleum–it imports around 6.5 million barrels a day, according to CLSA–it has benefited as well, but its dependence on foreign oil is falling fast.

In the chart below you can see how breakeven prices increase as both global oil demand grows and the geological formation requires more sophisticated–and expensive–extraction methods.

Larger Image

Which Industries and Companies Have Benefited?

To answer this question, Strategic International Securities Research (SISR) ran a correlation coefficient between the retail price of gas and 72 global industry classification standard (GICS) sectors, focusing on the years 2000 through 2014. Below are the top three sectors that ended up benefiting the most from falling gas prices. They all have a negative correlation coefficient, meaning that their performance has historically gone in the opposite direction as the price of gas, similar to a seesaw.

What this data shows is that the U.S. manufacturing industry has regained the cost benefit advantage to Chinese manufacturers. It’s becoming more and more attractive to build and create here in the U.S. because the cost of energy is relatively low.

Leading the list is automakers, suggesting that when gas prices have dropped, consumers have felt more confident purchasing new cars and trucks. Today consumers are even returning to vehicles that are known to guzzle rather than sip gas, such as SUVs, pickup trucks and crossovers. Ford’s F-Series continues to blow away its competition. Since mid-October, General Motors has delivered 7 percent, Ford 11 percent and Tesla, which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX), 12 percent.

It makes sense that airlines would perform better, since fuel is typically their largest single expenditure. In 2012, when the average price of a barrel of oil was $110, fuel accounted for 30 percent of airlines’ annual operating costs. Low fuel costs are cited as the main reason why Virgin America, which went public last week, reported third-quarter profits of $41.6 million, an increase of 24 percent year-over-year. The NYSE Arca Airline Index has flown up 110 percent since the beginning of 2013, hitting 13-year highs, and Morgan Stanley recently took a bullish position toward airline stocks, showing that company balance sheets are “structurally sound enough to make ‘events’ in the next five years unlikely” and that the industry as a whole is now growth-oriented.

It also makes sense that aluminum would benefit, given that the metal requires a notoriously large amount of energy to produce.

SISR highlights a few industries that surprisingly have had a positive correlation coefficient: department stores, apparel retail and luxury goods. You’d think it would be safe to assume that the retail sector benefits when consumers have been given relief from high gas prices. This is certainly the case now: Walmart, a bellwether for general market sentiment, is hitting new highs, and Tiffany & Co., which we own in our Gold and Precious Metals Fund (USERX), is also thriving. But in the past, low oil and gas prices have been reflections of a weak domestic economy. The average price per barrel of crude in 2009 was $62, a sharp decrease of nearly 40 percent from the average in 2008. Today, gas is inexpensive not because the economy is weak but because frackers are simply too good at what they do. They’re victims of their own success. What has hurt them has helped American consumers build more disposable cash flows, which can now be spent on fast food, retail, home improvement and other goods and services.

OPEC Unlikely to Make Production Cuts, Consensus Says

Members of the Organization of the Petroleum Exporting Countries (OPEC) will be meeting on the 27th, and no doubt the discussion will center on whether to curb production to help oil prices recover. However, a new poll shows that commodity and energy investors do not believe such a cut will occur. According to BMO Capital Markets, 87 percent of those polled believed that no cut would be agreed on. Even those who said a cut would happen believed it would be no more than a million barrels a day, an insignificant amount.

Of course, this is merely a poll, but we might be looking at cheap oil and gas for an indefinite amount of time, with a bottom possibly reached sometime between now and February.

In the meantime, American producers will continue to pour out record levels of oil, and President Vladimir Putin’s antics in Ukraine will continue to stir up geopolitical tension. Saudi Arabia appears to be more aligned with Europe and the U.S. against Russia, Syria and Iran.

All of this short-term activity might be bad for the fracking industry, but the big winners are consumers and investors. We’re in a steady, modest expansion of our economy and this is good for investing in domestic stocks.

Members of the Organization of the Petroleum Exporting Countries (OPEC) will be meeting on the 27th, and no doubt the discussion will center on whether to curb production to help oil prices recover. However, a new poll shows that commodity and energy investors do not believe such a cut will occur. According to BMO Capital Markets, 87 percent of those polled believed that no cut would be agreed on. Even those who said a cut would happen believed it would be no more than a million barrels a day, an insignificant amount.

Of course, this is merely a poll, but we might be looking at cheap oil and gas for an indefinite amount of time, with a bottom possibly reached sometime between now and February.

In the meantime, American producers will continue to pour out record levels of oil, and President Vladimir Putin’s antics in Ukraine will continue to stir up geopolitical tension. Saudi Arabia appears to be more aligned with Europe and the U.S. against Russia, Syria and Iran.

All of this short-term activity might be bad for the fracking industry, but the big winners are consumers and investors. We’re in a steady, modest expansion of our economy and this is good for investing in domestic stocks.