Crude & Natural Gas should be nearing trading lows

The near-term pullback in S&P to kick off the last couple days of January trading doesn’t appear too serious, and it’s still likely that SPX should finish with strong gains for this month.  As of 1/30/23 close, SPX remains higher by more than 4.5% higher, and five sectors are outperforming the market year-to-date with one day remaining: Communication Services, consumer Discretionary, REITS, Technology and Materials.

While hourly momentum (Relative strength index (RSI) entered short-term overbought conditions as of last Friday, and breadth did finish negatively on Monday to the tune of 3/1 negative, pullbacks won’t do much damage barring a break under 3949, while the area under that level lies at 3885. 

Uptrends remain very much in place from late December 2022, and daily momentum gauges continue to show a strongly positive slope.

Outside of Equities, both Treasury yields and the US Dollar have shown some minor stabilization of late. Yet, trends on both are negative and minor bounces should still be an opportunity to bet on lower prices for both. 

Cycle composites show a bottoming out in late January and show upward sloping prices into mid-February and ultimately into mid-March, directly coinciding with similar projections on Treasury prices to rally over the next couple months. 

Thus, until/unless there is some type of meaningful pullback under 3949, dips in the next 1-2 days should be buyable into/post FOMC for rallies back over 4100.

Crude oil should bottom likely by next week and turn higher in February

Energy looks to be close to bottoming out after a difficult couple months from late 2022.

While most of the Energy complex did quite fine, weathering WTI Crude’s initial decline from Spring 2022, this caught up with Energy into late Fall.

At the time of writing, Energy has now underperformed over the last 1-week, 1-month, and 3-month basis. 

Yet, momentum based on MACD indicator is positive on a daily and weekly basis following a more than 10% push off the lows from early December.

Many might suspect a move to new multi-week lows is a negative, with prices holding where needed on the upside to keep this bear trend intact.  However, momentum has been improving while cycles look to be near bottoming out for both Crude oil and Natural Gas.

Technically, I feel that $76-$77.50 is an attractive initial level to consider support for WTI Crude.  Wave structure suggests that the lows likely were put in at $70 back in December 2022. Thus, near-term weakness could bottom out sometime this week and begin turning higher.

This would also indicate that Energy should be approaching a period of seasonal strength which normally begins in February and carries higher into the Spring.

Hourly charts show what appears to be a five-wave advance into mid-January as part of a potential third wave higher off the December 2022 lows.  Thus, this could should be correct unless January lows of $72.46 are taken out (Front month WTI Crude Futures)

Natural gas has also gotten “so bad, it’s good”

While many note that Natural gas (NG 6.62% _F) production is up 5% year-over-year, which coupled with a warmer than expected Winter in US and Europe might combine to produce further declines in price, my technicals seem to suggest Natural Gas should be near a turning point.

3 factors stand out as to why Natural gas could bottom out this week:

1. First, prices have gotten oversold and right near prior lows in UNG(Natural gas Fund LP)
2. Second, cycle composites show a bottom for Natural Gas on January 30^th and the start of a rally into February.
3. Third, DeMark based exhaustion is finally in place for NG_F, with TD Sequential and TD Combo “13 exhaustion” signals (Buys) on prices of UNG along with front and second month NG Futures charts.   (Note, weekly UNG charts also have produced a TD Combo weekly 13-exhaustion countdown signal)

Thus, while I mentioned this last week as something that might be close to bottoming, as of this week, prices look to be at make-or-break levels and I expect a low to be imminent. Upon confirmation of DeMark buys, one can utilize that to consider following the trend for a bounce.

Until then, assets like Natural Gas futures, and/or BOIL -0.84%  Proshares Ultra Bloomberg Natural Gas ETF, are highly volatile, and difficult to utilize to pick lows following a 70% decline in NG_F from last Fall’s highs near $10.

Only upon proper stabilization and the start of a bounce this week would it be right to consider that NG_F could make a large bounce.  Until then, UNG looks far more steady and less volatile than the leveraged BOIL, as a way to play an upcoming bounce.

Stocks that correlate strongly with Natural Gas like Range Resources (RRC 4.96% ) or Chesapeake Energy (CHK 2.74% ) or even DTE Energy Co. (DTE -0.46% ) are all difficult to buy technically given recent downtrends and a lack thus far of any stabilization.  However, if my theory on raising NG_F prices proves correct, these stocks are likely to cease their ongoing downtrends and start moving higher.  This should be something to watch carefully for.

Refiners look to be bottoming relative to broader Energy space

Interestingly enough, when looking at the Refiners relative to the Equal-weighted Energy ETF (RYE through Invesco), this is showing the first signs of bottoming in nearly two years.

Barron’s reported over the weekend that Refining capacity has fallen to 85% (January 30^th, 2023 Barron’s – How to Invest in China Now (Article-“It’s a Refiners World for Now”).

I added Valero Energy (VLO 0.00% ) to my UPTICKS list last month, and it has promptly broken out to new high territory, and looks terrific technically.

However, this group as a whole looks to be just starting to show some evidence of bottoming out after a difficult couple years.

DeMark weekly exhaustion signals are now present and have been confirmed, on the VanEck Oil Refiners ETF (CRAK 0.35% ) vs RYE, and we’ve seen the start of stabilization and a recent rally in this sub-industry.  I feel that with Crude showing evidence of likely bottoming out, along with China’s reopening underway which could help demand, the Refiners group looks attractive for further gains, based on a combination of technicals and fundamental shifts on supply/demand.

Thus, VLO looks to be one of the better ways to play a meaningful period of mean reversion for the Refiners.  In addition, MPC -1.91%  and/or PSX -0.16%  are other stocks to consider.