The wild swings in crude oil over the past 10 year show that this sort of prognostication is dead wrong, even if it may come at exactly the right time.
The monthly chart below shows the parabolic rise from the 2005 low in the $40's to the 2008 peak in the $140's. Most of that manic move came from early 2005 low near $50 to the $147 extreme by July 2008 (a 200% rise in 18 months). The "news" that was attached to that unsustainable rally was the peak oil myth, in which we were facing diminishing production rates of a finite resource, and maximum production wouldn't be able to keep up with surging demand. That linkage came just in time for the last hedge fund to borrow its last margin dollar to max out its long exposure to crude. Then, according to the myth, either global demand fell by 78% in the next six months, or someone found a lot more crude somewhere, and crude prices tanked to $33.
Down at those lows, which was, again, only six months from the peak oil "news," a new myth became linked to crude's devastating crash: The world is drowning in oil. There's an oil glut! Now, these diametrically opposed myths didn't come out of nowhere. They were proposed by those firms with the greatest exposure to the crude market: the big Wall Street banks.
The "crude above $150" touts returned soon, but this was after the commodity was near the lowest low in decades. Rather, after oil rose from $33 to back to more than $100 by 2011, stories of crude shortages returned, along with other stories that justified the continuing rise in oil.
Again, perfect timing (just like in 2008 and 2009), but the predictions were in the perfectly wrong direction. Notice that the higher highs of 2011 above 2010 came with lower highs in stochastics. That's a bearish divergence sell signal, according to the decision support engine. Although it took took three years of sideways to downward action off the 115 peak of 2011, the bulls finally gave up on their myth of shortages in 2013, and prices have crashed, again, to the $30's (as of last month's $38 test).
Keeping with the theme of perfect timing but perfectly wrong direction, the decision support engine has allowed us to predict in recent months that there would be an imminent low in crude "below the March lows." More importantly, we've warned to expect some news to arrive that justifies the herd's belief that crude is headed even lower. That news is floating now as the Saudi and Russian officials are saying they won't curb their production. Whatever the actual news turns to be, the objective conclusion to the question of "If I had no money in crude, would buying or selling actions be indicated here?" is for buying actions only.
What's next? Historically, this pattern of good timing/bad direction calls should lead Friday's call by Goldman Sachs to be the trigger for prices to end their decline of the past few days (to $43 from $49) and bubble toward the pink box in the chart above in the coming months to quarters. Crude oil should at least get into the $55 zone in the coming weeks.
The decision support engine warns that if you are short, you should place buy stops at the $49.33 level to protect from a violent short squeeze, or use buy limits to either buy today or on further tests of $43 next week. If you're flat, these parameters should be used to establish long exposure. And if you're long already, maintain or add per these parameters.
History shows that when sentiment becomes so extreme as to allow huge calls to be made for price continuation after a long-term trend is obvious, it's obviously the wrong bet to make (editorial license taken on Joe Granville's warning that "if it's obvious to the public it's obviously wrong.") The amount of time and resources the media are giving to the "crude to $20" call magnifies the extreme of the sentiment, and perhaps the desperation of the firms with overextended (in this case, too short) exposure.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.