Why It’s Time To Sell Oil

oil etfsTyler Durden:  Following this weekend’s news that the massive Calgary fire, while still spreading, may soon be under control courtesy of some wet weather and favorable winds, as well as the stunner from Saudi Arabia that Ali al-Naimi was out, replaced with a puppet of the hawkish deputy drown prince Mohammed bin Sultan – a succession many saw as bearish for future oil prices – algos had refused to give up on recent momentum, and pushed WTI just why of $46/bbl overnight. However, to Bank of America this proved too much, and the bank’s strategist Paul Ciana has come out with a new trading recommendation as follows: “Sell WTI Crude Oil: Sell crude oil into event driven stress at $45.75, stop at $48.25. Target market profile levels of $38.50 and possibly $35.25.”

If this was Goldman, we would say sell everything and buy WTI on 3x margin. With BofA, however, we are less sure – this may even be a correct recommendation.

Here are the details from the BofA technician:

Price action at fair value resistance suggests correction

Three intraday crude oil rallies were sold last week resulting in prices closing near the open of the trading day. According to Japanese candlestick analysis; Wednesday, Thursday and Friday each formed a doji* candle suggesting indecision amongst market participants to effectively push prices higher. On April 29th crude oil reached an intraday high of $46.78 and closed near the open of the day forming the first of four doji candles in six trading sessions. Thursday can loosely be considered a gravestone** doji, which as the name implies is bearish.

Aggregate volume and open interest bearishly diverge

The rally to the YTD high occurred on light volume. Considering the total (aggregate) volume across all WTI crude oil futures contracts, volume during the rally in the latter half of April was less than the rolling 15 day average. The decline from the YTD high occurred on greater than average volume. Since the rally began from the YTD low, the trend in aggregate open interest has bearishly diverged from price.

A look back at the golden cross is insignificant

Since 1983 there have been 23 occurrences when the 50 day moving average crossed above the 200 day moving average. By the time the 50 day average crossed back below the 200 day average, price was higher only 9 out of 23 times. When analyzing price action between the up cross and down cross points, the high price was before the low price 13 out of 23 times.

Refreshed market profile chart provides updated levels

In our March 1st report, our market profile chart implied a close over $34.25 would prompt a rally to $39-$40, and it did. We later pointed to a sustained rally to $45.50  that would continue to fill the remainder of the prior distribution gap. Price reached this level in the end of April filling some of the 8/1/2015 – 2/29/2015 distribution gap.

Our updated market profile chart now shows $46.75 is the top of the value area in the 8/1/2015 – 2/29/2015 distribution and that aligns with the bottom of the value area of the 1/1/2015 – 7/31/2015 distribution. This ($46.75) is a major resistance level. A close through it could prompt a rally to $51.00 which opens the possibility of filling another distribution gap. However previously mentioned technical conditions suggest a decline and so we see $38.50 (3/31 POC) and $35.25 (value area 3/31) as major support levels.

Preliminary signs of a developing base

If crude oil prices were to decline for the next four to eight weeks, it would start to form the right shoulder of a head and shoulders bottom. While this is very preliminary, a decline to the mid to upper $30’s followed by a rally through resistance of about $45 would form an intermediate sized head and shoulders bottom that could project crude oil prices much higher.

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