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Money Flow Into Commodities: A Look at Crude Oil


Last week West Texas Intermediate jumped over 6% and broke a massive 10-month base with a nearly perfect symmetrical pattern. Here's what it all means.

The history of the past interests us only in so far as it illuminates the history of the present.
--Ernest Dimnet

What a crazy weekend for central Florida, from the All Star celebration to the Daytona 500. Talk about bringing together a variety of people from every walk of life. If that was any indication of the broader economy, it's no wonder the market has not stopped for a breather thus far this year. Frankly it was quite the shocker to see my firm's Friday afternoon traditional get-together at the local gin joint go from local business professionals to a $400 cover charge with an hour wait to get in. P. Diddy even paid $25,000 a night to rent a condo adjacent to our new office. Can you say gouging? Perhaps we're just use to the "small town" mentality. We'll soon find out the "city" mentality when we speak at the Annual MTA's (Market Technician Association) annual symposium in April at NY's Pier 60. Nonetheless, it gave us a nice 'excuse reprieve' from coming into the office over the weekend.

With all the visiting "bling" throughout the weekend we couldn't avoid thinking about commodities and this past week's resurgence (all except natural gas, which is toying with a 12-year low). For as long as people have been investing there have been Wall Street adages which surfaced to remind investors of typical misstates:
  • Never short a dull market.
  • Climb a wall of worry.
  • Rising tides lift all boats.
  • Don't fight the tape.
  • The trend is your friend.
  • There's always a bull market somewhere.
But my favorite of all is: It's the lightning bolt you don't see that kills you.

However, this particular adage can be somewhat aloof. Essentially it's when everything seems too good -- particularly in a market that has been as schizophrenic as ours over the last decade-plus. Otherwise stated: Investors' optimism should be held with some semblance of cautiousness, and they should be aware of their surroundings. Hence the topic of today's missive: money flow into commodities.

Watching money flow is an essential part of being a portfolio manager. You can invest in the greatest company in the world, but if no other investors hold the same opinion, you could be sitting on a train that may never leave the station. Solution: Find another route. With commodities, especially oil, this can be a double-edged sword.

Last week WTI (West Texas Intermediate – otherwise coined, light sweet) jumped over 6% and broke a massive 10-month base with a nearly perfect symmetrical pattern. About 10 years ago my firm coined the term: Two-Headed Monster. It referred to a head-and-shoulders pattern with two heads. This oil pattern requires yet a new name – to be determined. Essentially, crude shows an inverted two-headed monster, but with two sets of shoulders. (See below.)

Click to enlarge

Obviously the name is irrelevant. But what isn't irrelevant in technical analysis is the symmetry. The more symmetrical the pattern, the more relevant and formidable; ie. trustworthy. As you can plainly see, the two left and two right shoulders' drawdowns are nearly identical, along with the time associated with creation. The same goes for the two heads. This is all good, but what's really great is its congruency. If you were to fold the chart in half based on time, it's nearly identical (blue line).

So what does all this mean? The more "formidable" the pattern, the more likely it will achieve its goal (measured move). In this instance we add the size of the base to the neckline break. (A $30 move from trough to peak added to the neckline of $105 equals $135.) When calculating the time it took to build the base (10 months), this (assuming a technically perfect world) would put us at year end. (Please note: This is not a prediction nor a recommendation but merely a technical observation).

So what about the double-edged sword and lightning-bolt comment earlier? Many investors are anticipating a correction (small or otherwise) – nothing goes up forever (another adage). What no one knows is what the catalyst will be – considering that it seems as if no one cares about Greece anymore as the US markets have become completely bifurcated from the rest of the world. However, once WTI reaches $110 a barrel you will begin to see many economists, pundits, and traders discuss the relationship of oil prices to GDP. Taking a lesson from history, when that happens it will spread like wildfire, and it will be the new focus.

We hope this helps.

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News
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No positions in stocks mentioned.

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