Should You Buy Into This Oil Rally?

I don’t want to sound like I’m whining here, but my job is pretty difficult right now. I get paid to watch markets and give my opinion on them, something that a lot of people do for fun, but even though I know that makes me incredibly lucky, it isn’t always easy. Sometimes, and this has been the case recently, I struggle to understand what is going on and have no clear sense of the direction of the next move. When that is true, it is important that you aren’t afraid to admit it to yourself, and in my case to all of you too.

Failure to do that usually leads to you forcing yourself into a position in one of the markets you follow, which for me would be WTI and Nat Gas futures and energy-related stocks. It is not that none of them are moving…they are. It’s just that the moves right now are counterintuitive, making predictions really no more than guesses.

Take crude for example…

The latest move was an interesting one. The break of the 50-Day MA (blue line) led to what looked like a long-overdue drop. However, that stalled when the price hit the yellow, 100-Day MA line and reversed back to above the 50. So, what does all that mean?

Well, first, it means that if you paid attention on September 4^th when I wrote here that just that was likely to happen, you made some good money. Also, it means that we are back to where we started, and in an upward trend that makes no sense.

The U.S. economy is still weak, with unemployment over 8%, and nor is the global situation anything to write home about. Supply is down, to be fair, but that is why WTI has recovered from its crazy April lows. The market’s focus has been on demand for some time, and it is increasingly clear that the “recovery” in the U.S. is nowhere near what most people anticipated. So, why are we back up here? It beats me!

Normally in that situation, even though I am all too aware of the old traders’ saying that the market can stay illogical a lot longer than you can stay solvent, I would be tempted to sell. In this case, though, the technical picture tells me that that would be a dumb move. As I pointed about, we have just moved back up above the 50-Day MA and that will make it a strong support for a while.

So, logically and based on fundamentals, selling oil futures makes sense; but from a technical perspective, it doesn’t. Sitting on my hands until that conflict resolves itself feels like a pretty smart thing to do.

Nor is the picture any clearer in good old natty…

A rush through the 50 MA took that on down to the 100, but once again the attempt to break that support failed, leaving the next move uncertain. Conventional theory would point to a continued bounce, but yesterday’s big drop was sparked by some truly awful storage data, so here too the fundamental picture makes that a risky play.

With both natural gas and crude caught between conflicting technical and fundamental signals, then, predicting moves for any associated stocks would be foolish.

So, here I sit, with my hands firmly beneath my rear end. Given what I do for a living, it is tempting to just pick a market and make a guess in order to write something, but that would not really help you, the reader. Instead, I decided to explain why I’m doing nothing. A mentor of mine when I started out in the interbank FX market told me early in my career to always remember that “square is a position too” and, for all the reasons listed above, right now it is the right one to have.