Navigate Energy Complex Corrections Conservatively

January 18, 2017 2:47AM CST

MAR CRUDE OIL

Overnight's relapse below Mon's 52.90 low in the now-prompt Mar contract stems last week's recovery attempt and leaves yesterday's 54.32 high in its wake as the latest smaller-degree corrective high the market must now recoup to expose the intermediate-term trend as up.  In this regard 54.32 may be used as a tight but objective risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can be objectively based and managed.

Despite this relapse however the market remains above last week's 51.59 low, support and end to what appears to be a 3-wave affair as labeled in the 240-min chart below.  Left unaltered by a relapse below at least 51.59 and preferably 50.70 (for a complicating reason we'll discuss below), we cannot ignore the bullish prospect that this month's sell-off attempt is just another correction within the past year's major uptrend.

Crude Light 240

On a daily log active-continuation basis below, it's easy to see the combination of waning upside momentum over the second-half of Dec and the prospect that the rally from 14-Nov's 42.20 low is a complete 5-wave Elliott sequence that is now prone to a larger-degree correction lower.  However, the market is arguably still holding gains above the 51-to-52-handle-area resistance that capped it for six months and now, since broken in early-Dec, is considered a major new support candidate.  On this larger-scale basis a relapse below last week's 50.71 low in the then-prompt Feb contract (not the 51.59 low in the Mar contract) is arguably required to, in fact, expose a longer-term trend lower.  The monthly futures contract role is always a "gray area" with respect to identifying risk parameters and even more so in a lateral, choppy environment like this market has been in over the past month, requiring a more conservative approach to risk assumption.

Crude Light Daily

Crude Light Weekly

From a long-term perspective we continue to believe the market is still in the relatively early stage of a major reversal to the secular bear market from May'11's 114.83 high to Feb'16's 26.05 low as shown in the monthly log scale chart below.  In addition to late-Dec waning upside momentum and a complete 5-wave rally, frothy levels in our RJO Bullish Sentiment Index and the market's flirtation with the (54.69) 50% retrace of the nearly 5-year bear from 114.83 to 26.05 contribute to an interim peak/correction environment.

If the longer-term bull is as strong as we believe it to be, we would anticipate any sell-off attempt to be relatively shallow and short-lived, even if the market breaks our longer-term risk parameter at 50.70 .  Nonetheless, if/when the market breaks 50.70, even long-term traders are advised to move to the sidelines in order to circumvent the depths unknown of a larger-degree correction or reversal lower.  Such a more conservative approach to risk assumption errs on the side of whipsaw risk rather than larger nominal risk.

These issues considered, a cautiously bearish policy remains OK for shorter-term traders with strength above 54.32 in the now-prompt Mar contract to move to the sidelines.  Longer-term players are advised to maintain a cautious bullish policy with a failure below 51.59 required to pare exposure to more conservative levels with subsequent weakness below 50.70 to jettison the position altogether.

Crude Light Monthly

FEB HEATING OIL

While heating oil has confirmed a bearish divergence in momentum that breaks the Nov-Jan uptrend, the 240-min chart below shows the technical construct to be similar to that discussed above in crude oil.  Overnight's relapse below 1.6456 stems the past week's recovery attempt and defines yesterday's 1.6957 high as the short-term risk parameter the market needs to recoup to mitigate a broader bearish count and reinforce a bullish one.  This said, the market's position still above last week's 1.6064 low and end to a clear 3-wave sell-off attempt maintains an alternate bullish count that contends that that 1.6064 low completed or defined the lower boundary to a broader bull market correction.

Needless to say, a break below last week's 1.6064 low obviously reinforces a count calling for a larger-degree correction lower while a recovery above 1.6957 mitigates a deeper corrective count and tilts the directional scales laterally-to-higher.

NY Gasoline 240 min

NY Gasoline Daily

Both the daily log scale chart above and daily close-only chart below show a clear and complete 5-wave Elliott sequence from mid-Nov's low that is now prone to correction.  On a close-only basis however the fact that the (1.6088) 38.2% retrace of Nov-Dec's 1.4156 - 1.7282 rally has thus far held highlights last week's 1.6114 low close and 1.6064 intra-day low as ones of developing importance.  A break below these levels reinforces a count calling for a correction or reversal lower that could be steep given frothy RJO Bullish Sentiment Index levels.

NY Gasoline Daily

NY Gasoline Weekly

Only a glance at the weekly (above) and monthly (below) log scale charts is needed to see that the major trend is up and that setback attempts should first be approached as corrective buying opportunities.  A current and frothy 76% reading in our RJO BSI could leave this correction vulnerable to a steeper setback however.

These issues considered, a cautiously bearish policy remains advised with strength above 1.6957 required to threaten that call enough to warrant a move to the sidelines.  In lieu of such 1.6957+ strength further losses remain expected.

NY Gasoline Monthly

FEB RBOB

The technical construct of RBOB is more akin to that detailed above for crude oil with a break below last week's 1.5410 low needed to really expose a larger-degree correction or reversal lower.  Thus far the 240-min chart below shows early-Jan's sell-off attempt from 1.7095 to 1.5410 to be only a 3-wave affair.  Left unaltered by a relapse below 1.5410 , this 3-wave sell-off attempt could have completed or defined the lower boundary of a broader bull market correction.

As a result of overnight's failure below 1.5980 that arrested the recent recovery attempt the market has identified yesterday's 1.6624 high as the latest smaller-degree corrective high and new short-term risk parameter it needs to recoup to mitigate a deeper correction lower and reinforce a lateral-to-higher count.  In effect the market has defined 1.6624 and 1.5410 as the key directional triggers heading forward.

NY Gasoline 240 min

NY Gasoline Daily

The prospect that 03-Jan's 1.7095 high COMPLETED a 5-wave Elliott sequence from 14-Nov's 1.2865 low is pretty good, especially after yesterday and overnight's rejection of a recovery attempt.  But in the charts below the market remains ABOVE a ton of former resistance from the 1.52-to-1.47-range that, against the backdrop of the major uptrend, has to be approached as a new and considerable support candidate within the new long-term bull.

NY Gasoline Daily

The weekly log chart of the Feb contract below shows the magnitude of the past year's major uptrend.  A break of AT LEAST last week's 1.5410 low is required to expose a larger-degree correction or reversal lower.  The frothy 82% reading in our RJO Bullish Sentiment Index- its highest level in more than 2-1/2-years- contributes to a peak/reversal-threat environment that could leave the market very vulnerable to lower prices IF it breaks 1.5410.

In sum, shorter-term traders with tighter risk profiles are OK to maintain a cautious bearish policy with strength above 1.6624 negating this call.  Longer-term players are OK to maintain a cautious bullish policy with a failure below 1.5410 required to move to the sidelines in order to circumvent the depths unknown of a larger-degree correction or reversal lower.

NY Gasoline Weekly


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