Top Technical Tool For Commodities

Top Technical Tool For Commodities

In over thirty year of analyzing and trading crude oil futures it has become clear that it is a market that is often subject to the most outlandish price forecasts.  Many will remember that less than two years ago one well known analysts said that crude oil would never trade above $44 in his lifetime but he is not alone.

When prices have been declining some analysts seem to always want to climb over each other to lower their price forecasts. Before the hurricane hit Texas those that use fundamental analysis became even more bearish on crude oil as the November crude oil contract closed at $48.12 on August 25th

The next week on Jim Cramer’s Mad Money he made the case for much lower crude oil prices. (“Cramer's charts suggest oil prices are about to fall off a cliff”) as his guest suggested that crude oil could drop as low as $35.  They were not alone as the closing of many gulf refiners made others also conclude that crude oil prices must decline further.

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

I frequently comment on the HPI in my articles and have trained a number of traders on how to use it in their crude oil trading.  Unfortunately many use momentum indicators that I have found to be generally less useful.

 

To further identify the trend of the HPI I also use a weighted moving average of the HPI. The daily chart of November crude oil shows that the HPI dropped below its WMA on August 7th (line 1) which was a sign of weakness.

It stayed negative until September 1st (line 2) when I commented that “The HPI has been below its WMA and negative since early August. It turned positive on Friday and early strength this week will confirm this positive signal”.

Crude oil started to rally more impressively the next week.  The drop back to the 20 day EMA (point a) the following Monday took crude to a low of $47.59 but it then closed the week above $50. After the FOMC meeting on Wednesday afternoon September 20th crude oil was trading above the resistance $50.88. A strong close above this level will signal a move to monthly pivot resistance at $52.50.

The HPI analysis is also used to guide recommendations in the Viper ETF Report as traders went long the SPDR S&P Oil & Gas Exploration ETF (XOP) in early September.   This ETF is still below its quarterly pivot at $33.49. The 38.2% retracement resistance from the 2016 high at $44.59 is at $34.81 with 50% resistance at $36.67. The United States Oil Fund (USO) and other energy ETFs like the Energy Sector Select (XLE) are also followed in the Viper ETF Report.

Many in the financial media are fixated on the regular weekly supply and demand reports but I have found that often time the HPI is bullish when these reports are considered to be bearish . An article today about the latest IEA Report suggests it will “kill the bullish sentiment” . It would typically take the HPI a week or more before it could top out so the next few weeks will be interesting.

The December Comex Gold futures have had quite a run since the July lows but in early September as prices were making higher highs, line a, the HPI was starting to top out. The negative divergence in the HPI, line b, suggested that the rally in gold futures was topping out.

On September 12th the HPI violated key support at line c, which confirmed the bearish divergence. This negative signal came two days after the price high at $1362 and the December gold contract has since dropped sharply.

If you are interested in learning more about the markets and want specific ETF or stock advice I hope you will consider the Viper ETF Report or the Viper Hot Stocks Report. Reports are released twice a week for only $34.95 each per month.

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