Nymex crude oil futures gapped lower on March 9 as Russia and Saudi Arabia began a price war.
This morning, President Donald Trump indicated that the two oil producers are ready to cut production by at least 10 million barrels a day.
Crude oil traded as low as $19.27 a barrel on March 30 and this morning it traded as high as $27.39. This spike shows the power of the pivot, as my annual pivot is $26.31.
Trump plans to meet with U.S. oil executives on Friday to discuss crude-oil weakness. Here’s the story as posted on TheSteet.com.
When I saw the price gap lower on March 9, I thought that oil would hold my annual value level at $26.31, but it continued lower, making this level a pivot or magnet.
The Daily Chart for Crude Oil
Courtesy of Refinitiv XENITH
The daily chart for Nymex crude oil shows a trading range between $50 and $65.65 a barrel. The latter figure was the 52-week high, set on Jan. 8.
Then came the decline: Demand at the gas pump plunged as Covid-19 became front-page news.
Jan. 8 was a key reversal sell signal, as the day’s close of $59.61 was below the Jan. 7 low of $62.11.
A death cross sell signal occurred on Feb. 26, when crude oil closed at $48.73. This occurred when the 50-day simple moving average fell below the 200-day simple moving average to signal that lower prices would follow.
The price gap lower on March 9 marked the beginning of the price war between Russia and Saudi Arabia. Weakness below my annual pivot at $26.31 began on March 18.
Today’s rebound provided a retest of the annual pivot.
Strength above this pivot should be limited to this month’s risky level at $35.66 and the second-quarter risky level at $39.04, which are within the price gap.
The Weekly Chart for Crude Oil
Courtesy of Refinitiv XENITH
The weekly chart for crude oil is negative but oversold, with the nearby contract below its five-week modified moving average of $34.93.
Oil fell below its 200-week simple moving average, or reversion to the mean, at $55.61 during the week of Jan. 24. This accelerated the downside.
The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 8.32 from 9.2 on March 27. This level is below 10, making oil too cheap to ignore.
If oil ends this week above $25.24 this week will be a key reversal. This occurs as the multiyear low was set this week and the close is above last week’s high, which is $25.24.
Trading Strategy: Buy weakness to t,he March 30 low of $19.27 and reduce positions on strength to the monthly and quarterly risky levels at $35.66 and $39.04, respectively.
How to use my value levels and risky levels:
The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.
Second quarter 2020 and monthly levels for April were established based upon the March 31 closes.
New weekly levels are calculated after the end of each week.
New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.
A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.
A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.