- Some of the more reliable technical reversal patterns I look for are new 4-month highs (bullish) and 4-month lows (bearish).
- In the energy complex RBOB gasoline posted a new 4-month high during April, followed by distillates during July, with crude oil and natural gas following suit in early August.
- What makes the sector even more bullish is futures forward curves for all but natural gas are showing strong backwardation (inverses).
The energy sector continues to grow more bullish, with Wednesday’s spotlight on both crude oil markets (Brent and WTI) and natural gas (the famed Widow Maker) as these markets posted new 4-month highs over the course of the session. What is significant about a new 4-month high? Going back to the textbook I used to teach myself technical analysis[i], there is a section on the four-week rule (pg. 268). Quoting from the book, “The system based on the four-week rule is simplicity itself: 1. Cover short positions and buy long whenever the price exceeds the high of the four preceding calendar weeks. 2. Cover long positions and sell short whenever the price falls below the lows in the four preceding full calendar weeks.” When I apply my Goldilocks Principle[ii], usually for theoretical hedge positions (long or short), I stick with the four-week rule. However, when I’m looking at long-term trends of markets (investments, white papers, outlooks, etc.) I modify the rule to four months. Given the five major energy markets have all posted new 4-month highs since this past April, investors could be ready to jump into the sector with both feet. But there’s more than bullish technical patterns to guide them. There are also fundamentals.
Starting with WTI crude oil (CLU23), the continuous monthly chart (spot-month contract) was showing a 4-month high of $83.53 heading into Wednesday’s session (Brent’s previous mark was $87.49). Spot WTI hit $83.81 early in the day before extending its rally to $84.65 (Brent (QAV23) hit a high of $87.66). With the spot-futures spread showing a backwardation of 70 cents, with deferred spreads showing similar price differences, we know both the short-term and long-term supply and demand situation is bullish (for whatever reason from the long laundry list we can point to). And since both technicals and fundamentals are bullish, the upside target area is between $104.93 and $130.50. These prices mark the 61.8% (Fibonacci) retracement level[iii] and the previous high posted during March 2022.
In my August 1 Monthly Analysis I talked about how the spot-month natural gas (NGU23) contract had completed a bullish spike reversal during April, but given that pattern is less reliable and we were talking about the Widow Maker, traders might’ve been waiting for a new 4-month high to jump in as buyers. If so, they got what they were looking for Wednesday as the spot-month contract took out its previous mark of $2.878 on its way to a high of $3.018. What about fundamentals, though? Those who trade the market every day can speak to this better than I, but from my observation I’ve noticed the forward curve is seldom in backwardation. Today is no different, with a solid contango (carry) still showing. Does this mean the market is fundamentally bearish? No, for natural gas is the exception to the rule. Based on Wednesday’s breakout the initial target area is between $5.033 and $5.987, and we’ll see what happens after that.
Distillates (heating oil, diesel fuel, jet fuel, etc.) (HOU23) hit a new 4-month high during July, confirming its long-term trend had turned up. As with crude oil (both WTI and Brent), distillates’ forward curve is in backwardation with nearby contracts continuing to pull away from deferred issues. The spot-spread finished the day at 3.7 cents, its strongest daily close since July 11, 2022. With winter buying season upon us, the upside target area starts near $4.0480.
RBOB gasoline (RBU23) has been the leader of the sector, at least according to the calendar, posting its own new 4-month high this past April as it moved past $2.8122. While the market has posted some early Waves (Elliott Wave Theory), it extended its long-term uptrend to a high of $2.9960 during July. Again, with market fundamentals bullish the upside target area was and still is $3.4453.
What will the catalyst be for energy markets to continue to go higher? If US stock indexes take a breather for a few months[iv], investment money could move back into commodities. The last year has seen softs dominate, with market after market moving to record highs, with energies now taking center stage. Based on the latest CFTC Commitments of Traders report (legacy, futures only), there is plenty of room for funds to add to their net-long futures positions.
[i] Technical Analysis of the Futures Markets by John J. Murphy, 1986 edition. While algorithms may have made fossils out of much of technical analysis, I highly recommend this book and still use it almost daily in my work. Of course, I’m a dinosaur, so there’s that.
[ii] The Goldilocks Principle tells us, “Daily charts are too hot, monthly charts are too cold, but weekly charts are just right”.
[iii] In my analysis, when fundamentals are bullish I look for at least a 61.8% retracement (67% in stock indexes based on Dow Theory).
[iv] Based on the idea of a Benjamin Franklin Fish Similarity which tells us, “Like guests and fish, markets start to stink after three days/week/months (whatever timeframe being studied)”.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
