Any Signs Of A Crude Oil Top?

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May looks to be another strong month for crude as futures are showing gains of around 9% till Friday. It opened in 2022 at $75.69 and is now trading at $114. This is a gain of just over 50% so far this year. This should come as no surprise to anyone who buys gas but where the price of crude is going in the next few months is important for a number of reasons, including Fed policy.

In my analysis of the markets, I always start with longer term monthly charts as the daily changes are smoothed out which makes it easier to identify the major trend.

The chart follows crude oil prices from 2013 when crude went above $112 in August. Crude oil prices broke through in the fall of 2014 and began a nearly two-year decline. At the bottom of the chart is the volume confirmer which is a combination of volume indicators. it includes On-Balance-Volume (OBV) About which I have written earlier.

When it is above its short term moving average (MA) it is positive and the cloud is green. When the indicator moves below its MA the cloud is red and it is negative. Long term signals occur when it moves above or below the zero line. In September 2014 it turned negative by falling below the zero line, point A. After crude was down about 40%, it didn’t turn positive until October of 2017, point B.

The volume confirmer remained above zero till March 2020, point c, as it fell during the fall in the covid market. The confirmer turned back to positive in May 2020 as crude closed at $35.32. It was not until November 2020 that crude oil rose sharply. In October 2021, crude oil traded its monthly . stay above stark+ band, This was a sign that crude was propelled upwards. It dropped sharply over the next month but never closed below its reversal point (dashed green line).

Crude oil hit a high of $130.50 in March, point d, but then closed the month at $101.20. Crude oil has crossed its monthly Stark+ band over the past two months, which means it is still on an upward move. Although a market can remain above or below its stark band for several months, it is followed by a sharp reversal.

Monthly analysis shows no sign of top as of now as volume confirmers continue to make new highs and shows no divergence with prices. The monthly reversal is now at $84.74, so June will close below this level for a positive trend reversal.

Crude oil’s weekly chart shows it closed up 4.3% this week as prices were testing the 20-week EMA at $104.44 and chart support, Line A, for the past seven weeks. The next weekly resistance since March is at $116.64 and the weekly Stark+ band is at $136.48.

Weekly OBV, following a nine-week decline from late October 2021 (see shaded area), OBV sharply moved above its WMA in mid-January. OBV has been trading above and below its WMA for the past several weeks but has remained well above the support on line B.

Since the early 1980s I have relied on the Herrick Payoff Index (HPI) as a leading indicator in determining the direction of commodity prices. HPI is a mathematical way of measuring the money flowing in or out of a commodity by calculating the difference in dollar amounts each day. This is accomplished using volume, open interest and price data.

HPI’s chart includes a 21 period weighted moving average (WMA) that was crossed in mid-January with the zero line, point D. Resistance on line C was overcome after three weeks, which confirmed that money flow on the HPI was positive. HPI is now testing support on Line C. A move above the WMA could signal the next bullish crude oil rally.

Two-month resistance, Line A, is more pronounced on the daily chart and Friday’s close suggests that crude is nearing an upside breakout. Initial monthly R1 resistance lies at $121.04 and R2 at $126.97 based on the May price range. The June pivot, which is likely to turn after the last day of trading in May, is at $109.61.

The daily OBV closed the week at a new high as it continues to push up prices. HPI closed at +56.57, so money flow is positive but a strong move above resistance at line C could be preceded by an upward acceleration.

Both crude oil and large ETFs such as the Energy Select Sector (XLE) have seen rapid growth. So far in May, crude oil has gained 9.4% while XLE has strengthened with a gain of 17.8%. Looking at the strength of crude oil, it will take it below the weekly closing price of $109.64 to turn positive. The level to watch for XLE is the weekly reversal level at $78.38. The outlook for crude and energy stocks is higher for June as there are no signs of a top just yet.

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