Epiphany Research

Energy Is Falling Apart

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

The energy sector has fallen apart at the seams as crude oil reverses off of the highs, breaks the daily uptrend line and retest the weekly uptrend. The speed of the collapse in crude is catching many traders by surprise. From our point of view the sharpness of the move down in crude along with the weakness of the other commodities suggest a change in the nature of that market and one that should not be ignored. There is a positive created here by the easing of inflation that is implied by this commodity weakness, but we are much more concerned about the implications to global growth and the possibility of a meaningful slowdown.
The energy stocks have been forming distributive patterns and have rolled over. The group is under pressure as long-term holders are being shaken out and hedge funds are pressuring the sector on the short side. We would not try to jump on the short bandwagon here and put these stocks out at this point. The % of stocks > 40-day moving average is moving into oversold territory and the % of stocks > 200-day is getting close. We do believe the % of stocks > 200-day will move to a deeply oversold reading before a rally occurs, but we are in the red zone now and short trades should become unproductive from here and present a much greater risk of a snapback rally. We suggest waiting for the deep oversold readings to occur and cover existing shorts. Aggressive traders can buy at that point and look for a sharp counter-trend move.
The strength of the rally of of the oversold readings will tell us if the bull market for energy resumes or if this oversold reading is a " bad" oversold that only leads to a counter-trend move within a larger bearish structure.                                                                                                                                                      

The Retest in Crude

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

Crude oil is back to $67. This is the level that we have previously pointed out as being the critical retest. Crude has pulled back to the primary uptrend line and is holding for now. A break of this uptrend line would be the first trend break since 2003 and would signal a real change in the nature of this commodity. We're watching this level closely. Each time crude has pulled back traders have panicked and declared it the end of crude oil's and the energy sectors run, only to be proven wrong each time. It doesn't make much sense to look for an end to the bull market in oil and energy until your really start breaking some of these trend lines. This has been the problem with traders in the past. They simply believe oil is up "too much" and it needs to come in. I remember these same arguments mid way through the tech rally. So be careful when looking for tops. If the trend line breaks here it would be the first sign of a problem since the rally started in 2003, if it holds than its just more of the same.

Weakening Crude

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

Crude oil is starting to get weaker than we would have expected lately. We can't help but notice that crude didn't go up significantly on a string of bullish news, but it did sell off with conviction as each issue has been resolved. The Alaskan pipeline problem, Middle East tensions, and the prospect of another hurricane in the Gulf didn't push the commodity out to significant new highs, but as each problem is seen passing crude sells off. Keep an eye on the long-term uptrend line at $67. We may see a retest of this level in the coming days.

We Expected More

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

BP shut down production today at the Prudhoe Bay facility due to infrastructure breakdowns. This takes 400,000 barrels of production off of the market with no timetable for a return of this supply. You would have thought that crude oil and and energy sector would have had a stronger reaction, right? As it stands the effect is neutral today. Crude is up $1 and the energy stocks are flat on the day. Not much of a reaction. The energy department did announce that the strategic petroleum reserve would be tapped to offset this supply interruption, but that reserve needs to be replenished once the crisis is over.
This lack of a strong reaction is interesting and suggests that the supply demand situation may not be as tight as we assumed. The price of oil may have a lot more to do with geopolitical tensions than anything else right now. Watch the energy sector this week for any developing reaction to this news.

Inflation in the Pipeline

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

Commodity inflation isn't going anywhere. The bullish uptrend in the CRB index just keeps chugging along. Traders moved on after the commodity related stocks took a beating in this downturn and lost track of the broader bull move in commodities, which has continued unabated.
This is important because we are starting to see inflation generated at the commodity level filter down to the consumer. We've been waiting for this knowing that it had to happen eventually. Now it's here. The only question is how bad does it get and how will the Fed react?

Oil is Ready

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

Crude oil look to us like it's getting ready to make some sort of move here. We say this because the commodity is showing  contracting volatility that usually precedes a move. We are noticing that the Bollinger bands are "pinching in". Volatility contractions such as this usually lead to an expansion of volatility since volatility is anti-persistent. All this mean is low volatility usually leads to high volatility.
We can also see that the commodity has formed a bull flag in the uptrend. This type of formation is  a continuation pattern and suggests that the volatility expansion should be to the upside. It doesn't have to be, but the odds favor it. Keep an eye out for crude headed into next week.

China's Getting Serious

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

After posting the strongest GDP numbers in 10 years (11.3%) the Chinese Premier called for "urgent" measured to curb economic growth and avert an "economic disaster".
"We must take forceful measures to resolve prominent problems to prevent the economy's rapid growth from turning into overheating,"- Prime minister Wen Jiabao. (do they have a prime minister? almost sounds democratic.) (Article here )
It seems that China's primary choice for slowing down the economy is not the greenspan type of incremental rate hike, but to jump directly into the banking system and change policy there. They have recently raised bank reserve requirements and will increase restrictions on construction lending and new construction permits. If you follow China closely this is nothing new and in-line with the way they run economic policy in that country. They have already put restrictions on construction this year and will likely tighten existing policies.

China On Fire!

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

China GDP growth came in today at 11.3%. Now add back in the 3% that they knocked off the number and we're looking at something like 14% GDP growth for the quarter (here is the article). This is the strongest growth in over a decade. The economy in China is accelerating not slowing. This has huge implications for the commodities market as well as the surrounding Asian economies benefiting from the China "halo" effect.
China is much more likely to use direct intervention if it feels it needs to slow the economy down. This means restrictions on lending and construction. These are not tools that can be used by western central bankers and the effects are really unknown on a large economy such as China.
The China theme is alive and well and the upside pressure from this economy on the commodity market should not be underestimated. Traders have forgotten about this theme for now as the market here corrects. These GDP numbers suggest that commodity inflation may not be over.

***The bearish spin on these ripping GDP numbers sort of surprises me. (Article Here)

Volatile Energy

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

Crude oil has seen a volatile trading session so far today. The prospects of the tensions over the  Israeli incursions into the Gaza strip and Lebanon winding down have improved over the weekend. This combined with a rumor that the Iranians are ready to come to a compromise over it's own nuclear issues has prompted selling in the oil pits.
I'm a little more skeptical about the idea of the Iranians making compromises. They don't seem all that reasonable to me and oil is their most potent weapon against the west. I suspect they're not done with the inflammatory rhetoric or instigating Israel.

Crude Keep Rolling

Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com

Crude has broken out to a new high again. If you read some of our other posts on crude(Here) we addressed the bullish technical configuration for the commodity. This bullish configuration has broken out to the upside on the recent Middle East turmoil, bombings in Nigeria, and Iran's continued defiance in regards to it's nuclear program. If we throw a couple of hurricanes hitting the Gulf of Mexico things could get really interesting.
The large consolidation forming since last year is now resolving to the upside and we would expect this trend to continue building out. The real question is whether or not the building pressure in the commodity translates into upside pressure on the energy stocks.