Daily Reckoning UK

An Update On Oil – And A Different Way To Play It

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Frank Hemsley

by

Posted 28th July 2016

• No shock to the system
• Catching up with oil
• A way to play the falling oil price

No shock to the system from Janet Yellen yesterday then.

“Near-term risks to the US economy have diminished. Inflation’s not where we want it, but it could get there, some time. Things are generally cool. Not cool enough to raise rates yet. But pretty cool.”

Those aren’t her words of course. But that’s the kind of message: optimistic enough to give the market hope that rates may rise… but allowing room to hold off if inflation doesn’t turn up.

For now, US rates stay on hold. And attention turns to the next central bank policy announcement – the Bank of Japan in the small hours of tomorrow.

But enough of the fundamentals! Let’s get back to chart land and pick up on the oil story…

We last looked at crude oil in back on 21 June here: Oil price under pressure – here’s why and where it’s headed next

I was on the fence a little at the time, looking for confirmation before making a directional call. Here’s the chart back then:

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We’d seen that momentum in the uptrend was stalling – shown by the failure to break resistance at $52 and reach the top of the channel.

But at the same time, to have conviction that the trend had changed, I wanted to see a break of the channel support – i.e. the lower trend line. For me, a break of $48 was the level to watch.

So let’s catch up with where we are now. Here’s the chart brought up to date:

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As you can see, the price has clearly broken through the bottom of the channel now. Indeed, that $48 level was significant. It’s acted as a support level in the past. But since it gave way on 5 July, it’s now turned to resistance, stopping the price getting back to the top of the new down trend channel.

So the trend is clearly down now for oil. It’s been failing to reach the top of the channel and is now bouncing along the bottom.

Right now, the $42 level is key, being where the bottom of the channel combines with previous support. The big question is whether the price bounces off that level and moves back into the channel. Or breaks lower and heads towards previous support levels at $40, $38 and $36.

I’m inclined to go with the trend, i.e. down. The problem is that if the oil price does stay in and move to the top of the channel – which it could easily do, whilst still trending lower – then there is 400-pip risk from the current price ($42 to $46).

So I’d rather not be entering short at this level – not unless the support breaks.

I’m going to watch this a while.

Meantime, a better trade for me based on the same idea is buying USDCAD.

If the oil price heads lower from here, breaking through the channel, USDCAD should go higher. If oil rallies, my USDCAD trade will hurt. But there’s less risk on the table than I could get with a pure oil trade.

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