Blog Title: Canada, our home and native land.... of OIL. (CSTA, market update, futures charts explained, crude oil)
Hello, I am please to mention that I am helping dedicated professionals to bring back the Canadian Society of Technical Analysts Victoria Chapter. Please visit http://www.csta.org/Default.aspx?pageId=1336129 to view our Chapter page and feel free to come to our first free meeting with special guest, Greg Schnell, CMT (Stockcharts) on January 15th. Our chapter page will reveal more details shortly.
I am changing my blog to be issued quarterly. My entrepreneur lifestyle is too busy to do much more :-)
At first, the current subject of Oil didn't really get my creative and investigative juices going at the start of this month. I suppose as a trader I view the past price action and see the amazing volatility and trading opportunities oil has had, then I review the last few years.... Yawn (this boring time of course is the best time to make money!). But again, what is interesting is how oil relates to other markets but most importantly how it affects our Canadian system. This I can dig into with interest.
Lets hit and review the general markets first as usual. I have heard many times in the last year how traders and portfolio managers in the trend following arena say to ride the trend and even though it is obvious to everyone that this run from the 2009 lows is due for a pull back, that is not the current trade. The trend is up, so if you are not long the market, you are neutral. If you are not either, your most likely loosing money.
There will be plenty of warnings and indicators to show when the markets go negative. What indicators? What warnings? One handy tool is the MACD indicator (Moving Average, Convergence/Divergence)
Here's one example:
MACD is a great general momentum indicator and is perfect for volatile (yet trending) markets. If you look closely the 'fast' yellow indicator clearly indicates the tops which happened in 2000 and at the end of 2007. When it 'rolls over' (and simply goes negative), it's time to get out. At this point going into 2014 we are just waiting for that roll over time period if you are playing the long term game.
With a measured move back to the previous highs (2000/2007) it could wipe 75% of the 2013 gains. The question will be, will there be much more down movement once indicators turn bearish?(rhetorical question - always go with the trend until proven otherwise).
I listened to some recent 'expert' who thought the markets could decline quickly (when it does). Their argument is that there are ALOT of hungry portfolio managers who are struggling for yield to show to their clients. It is a very competitive yield environment at this time. What happens when these managers see the markets roll over and they see the potential losses that they worked hard to attain in the last few years? Do you not think they will try to lock in those gains as they know if they show a 0% return for 2014, it will be looked at much more favourably than their colleague who stuck with their defensive stocks and possibly lost money. Yes, this argument came from an 'expert' with no banter from the interviewer...
I am not an 'expert' but there is more to the markets than what he was pontificating. If indeed these 'managers' did need to do something to protect themselves from potential losses, I would think they are a little more sophisticated than that. I would think if a portfolio manager has a large amount of dividend stocks for instance, they would look at hedging their portfolio with shorting S&P or Dow future contracts and still accept dividends while protected from a downturn. This of course has the potential effect of adding selling stress to the markets if futures markets are pushed down and then could be a self fulfilling prophecy.
Anyway point is, markets are a lot more complicated than 'experts' always say they are. Thus why I created computerized trend following systems. There is no way I can be smarter than the market. But, computers can at least calculate, in a much more consistent fashion than any human, how to ride any trend that may exist.
Ah - George, such a way with words... lol...
Before we splash into the black stuff I am going to get nerdy in a trader sort of fashion. I found something interesting many years ago in my futures trading that not many people understand. Oil Futures contract is simply derived from the true (spot) price of Crude Oil, so it has a price and it will expire at some point in the future depending on the contract. For example the 'current' oil futures contract is a February 2014 contract. Before it expires you must offset your position (if you were long 1 contract, you would sell it to be neutral) or you will be the proud owner of 1000 barrels of crude oil (forgive me I am glossing over some details). What happens if you want to have a long term futures chart for oil though? Either you are looking at the spot price, continuous contract price, or the back-adjusted contract price. These can get you in trouble if you are not familiar with their proper usage. Spot price is similar to the continuous contract price on a long term chart, but move to a short time frame and you will see large gaps in price as the contract price moves from an old contract to the new one. The new one will (more than not) have a higher price as it is projecting the future value and incorporating the cost associated to traders desire to perceive more value, storage and carrying costs. Thus in shorter time frames it is handy to utilize the back adjusted contracts (or custom contracts) that quickly add the difference in price from the expiring contract to the new contract in the past.
Check out this chart. The top shows the continuous contract, the bottom: back-adjusted. The continuous chart mirrors the spot price whereas the back-adjusted increases the past values slightly as new contracts are added. The point is, if you are looking at long term futures charts make sure you are not viewing the back-adjusted contract.
Working off this chart, lets get into analysing oil before I have another nerdy moment. It appears Oil is compressing its current price between $94 and $110. The chart indicates this tug-a-war could continue for quite a long period, possibly into 2016. These 12 - 15% swings may coincide with other factors.
It was only a matter of time when I bring out my ratio charts... Comparing Oil with the US Dollar we are shown that there may be more immediate movements coming very soon. These two markets have been building a 10 year triangle and the apex is coming very soon. We should see some movement in either direction by the middle of this year. The only thing certain with the US Dollar is represented by the red resistance line.
Taking these two charts into comparison we could speculate a few things. Triangle resolutions are fairly substantial but even with Oil bouncing within the 94 to 110 range and USD staying between .75 and .82 we would have a breakout of this triangle pattern of 35% in any direction.
Oil's pattern is a bullish pattern which could see a measured move to an eventual high of $170 per barrel but this may not happen for another year of two. In the meantime the ratio chart may breakout to the downside.
As I've said, it all comes down to oil 'should' stay within the 94 to 110 range for awhile. If this is the case, what can we expect out of other markets?
The Canadian dollar moves generally in the same direction of oil, what is interesting is that it is sitting on the .935 support now. Will it break through? Hold? If it does break through then we could see the same levels as 2009 of about .80. Being that I am thinking crude oil is fairly safely meandering sideways for a year or so, it would stand to reason the CDN $ will bounce off this support and continue moving within it's channel of .935 and 1.055
Lastly though I am looking at the DJ Commodity Index
It may be again indicating a favorite pattern that could put it into the 100 to 150 point range (40+% decline). At this point it must move. It is either breaking up or down, there is no room left to move sideways. The commodity index's two largest holdings are Natural Gas and Crude Oil, so a weathered eye on this is important.
So... What did I learn? the commodity index looks like it needs to breakout and with the fact that oil/US$ are also reaching an apex, we may get volatility shortly in either direction. Also Oil and CDN $ look range bound, and the only thing that can be said for the US $ is that it has resistance holding it down. If any of these break, we will see how that affects everything else at that time.
Regardless, we are pumping out that crude from our pristine land in Canada.... It seems like all it is doing though is sustaining our economy and way of life (locally anyway, some Albertan friends are doing very well). Imagine if we did not have that... Where would we be then? Quantitative Sleazing?
Next Issue: Review past 2013 research. "I am still learning" - Michelangelo
Hello, I am please to mention that I am helping dedicated professionals to bring back the Canadian Society of Technical Analysts Victoria Chapter. Please visit http://www.csta.org/Default.aspx?pageId=1336129 to view our Chapter page and feel free to come to our first free meeting with special guest, Greg Schnell, CMT (Stockcharts) on January 15th. Our chapter page will reveal more details shortly.
I am changing my blog to be issued quarterly. My entrepreneur lifestyle is too busy to do much more :-)
At first, the current subject of Oil didn't really get my creative and investigative juices going at the start of this month. I suppose as a trader I view the past price action and see the amazing volatility and trading opportunities oil has had, then I review the last few years.... Yawn (this boring time of course is the best time to make money!). But again, what is interesting is how oil relates to other markets but most importantly how it affects our Canadian system. This I can dig into with interest.
Lets hit and review the general markets first as usual. I have heard many times in the last year how traders and portfolio managers in the trend following arena say to ride the trend and even though it is obvious to everyone that this run from the 2009 lows is due for a pull back, that is not the current trade. The trend is up, so if you are not long the market, you are neutral. If you are not either, your most likely loosing money.
There will be plenty of warnings and indicators to show when the markets go negative. What indicators? What warnings? One handy tool is the MACD indicator (Moving Average, Convergence/Divergence)
Here's one example:
MACD is a great general momentum indicator and is perfect for volatile (yet trending) markets. If you look closely the 'fast' yellow indicator clearly indicates the tops which happened in 2000 and at the end of 2007. When it 'rolls over' (and simply goes negative), it's time to get out. At this point going into 2014 we are just waiting for that roll over time period if you are playing the long term game.
With a measured move back to the previous highs (2000/2007) it could wipe 75% of the 2013 gains. The question will be, will there be much more down movement once indicators turn bearish?(rhetorical question - always go with the trend until proven otherwise).
I listened to some recent 'expert' who thought the markets could decline quickly (when it does). Their argument is that there are ALOT of hungry portfolio managers who are struggling for yield to show to their clients. It is a very competitive yield environment at this time. What happens when these managers see the markets roll over and they see the potential losses that they worked hard to attain in the last few years? Do you not think they will try to lock in those gains as they know if they show a 0% return for 2014, it will be looked at much more favourably than their colleague who stuck with their defensive stocks and possibly lost money. Yes, this argument came from an 'expert' with no banter from the interviewer...
I am not an 'expert' but there is more to the markets than what he was pontificating. If indeed these 'managers' did need to do something to protect themselves from potential losses, I would think they are a little more sophisticated than that. I would think if a portfolio manager has a large amount of dividend stocks for instance, they would look at hedging their portfolio with shorting S&P or Dow future contracts and still accept dividends while protected from a downturn. This of course has the potential effect of adding selling stress to the markets if futures markets are pushed down and then could be a self fulfilling prophecy.
Anyway point is, markets are a lot more complicated than 'experts' always say they are. Thus why I created computerized trend following systems. There is no way I can be smarter than the market. But, computers can at least calculate, in a much more consistent fashion than any human, how to ride any trend that may exist.
Ah - George, such a way with words... lol...
Before we splash into the black stuff I am going to get nerdy in a trader sort of fashion. I found something interesting many years ago in my futures trading that not many people understand. Oil Futures contract is simply derived from the true (spot) price of Crude Oil, so it has a price and it will expire at some point in the future depending on the contract. For example the 'current' oil futures contract is a February 2014 contract. Before it expires you must offset your position (if you were long 1 contract, you would sell it to be neutral) or you will be the proud owner of 1000 barrels of crude oil (forgive me I am glossing over some details). What happens if you want to have a long term futures chart for oil though? Either you are looking at the spot price, continuous contract price, or the back-adjusted contract price. These can get you in trouble if you are not familiar with their proper usage. Spot price is similar to the continuous contract price on a long term chart, but move to a short time frame and you will see large gaps in price as the contract price moves from an old contract to the new one. The new one will (more than not) have a higher price as it is projecting the future value and incorporating the cost associated to traders desire to perceive more value, storage and carrying costs. Thus in shorter time frames it is handy to utilize the back adjusted contracts (or custom contracts) that quickly add the difference in price from the expiring contract to the new contract in the past.
Check out this chart. The top shows the continuous contract, the bottom: back-adjusted. The continuous chart mirrors the spot price whereas the back-adjusted increases the past values slightly as new contracts are added. The point is, if you are looking at long term futures charts make sure you are not viewing the back-adjusted contract.
It was only a matter of time when I bring out my ratio charts... Comparing Oil with the US Dollar we are shown that there may be more immediate movements coming very soon. These two markets have been building a 10 year triangle and the apex is coming very soon. We should see some movement in either direction by the middle of this year. The only thing certain with the US Dollar is represented by the red resistance line.
Taking these two charts into comparison we could speculate a few things. Triangle resolutions are fairly substantial but even with Oil bouncing within the 94 to 110 range and USD staying between .75 and .82 we would have a breakout of this triangle pattern of 35% in any direction.
Oil's pattern is a bullish pattern which could see a measured move to an eventual high of $170 per barrel but this may not happen for another year of two. In the meantime the ratio chart may breakout to the downside.
As I've said, it all comes down to oil 'should' stay within the 94 to 110 range for awhile. If this is the case, what can we expect out of other markets?
The Canadian dollar moves generally in the same direction of oil, what is interesting is that it is sitting on the .935 support now. Will it break through? Hold? If it does break through then we could see the same levels as 2009 of about .80. Being that I am thinking crude oil is fairly safely meandering sideways for a year or so, it would stand to reason the CDN $ will bounce off this support and continue moving within it's channel of .935 and 1.055
Lastly though I am looking at the DJ Commodity Index
It may be again indicating a favorite pattern that could put it into the 100 to 150 point range (40+% decline). At this point it must move. It is either breaking up or down, there is no room left to move sideways. The commodity index's two largest holdings are Natural Gas and Crude Oil, so a weathered eye on this is important.
So... What did I learn? the commodity index looks like it needs to breakout and with the fact that oil/US$ are also reaching an apex, we may get volatility shortly in either direction. Also Oil and CDN $ look range bound, and the only thing that can be said for the US $ is that it has resistance holding it down. If any of these break, we will see how that affects everything else at that time.
Regardless, we are pumping out that crude from our pristine land in Canada.... It seems like all it is doing though is sustaining our economy and way of life (locally anyway, some Albertan friends are doing very well). Imagine if we did not have that... Where would we be then? Quantitative Sleazing?
Next Issue: Review past 2013 research. "I am still learning" - Michelangelo
Protect yourselves,
Lee MacFarlane
Derivatives Trader - President
Kinship Investments Ltd.
office (250-385-9132)
fax (250-385-9134)
Derivatives Trader - President
Kinship Investments Ltd.
office (250-385-9132)
fax (250-385-9134)
check us out on 
Legal:
Past performance is not necessarily indicative of future trading results.
Lee MacFalane is a derivatives trader trained under the Canadian Securities Institute and is working toward his CMT designation under sponsors with the CSTA (www.csta.org). He manages Kinship Investments, a Private Managed Fund (working under the Capital Raising Exception Act of the BCSC). Kinship Investments is not an advisory service and does not provide investment advice. This blog represents Lee MacFarlane's opinions only and is not intended to be used as investment advice. Lee MacFarlane and Kinship Investments may or may not hold securities that are discussed in this blog. Please contact lee@kinshipinvestments.com for further information or go to www.kinshipinvestments.com/trustfund.html to view our latest results.
Lee MacFalane is a derivatives trader trained under the Canadian Securities Institute and is working toward his CMT designation under sponsors with the CSTA (www.csta.org). He manages Kinship Investments, a Private Managed Fund (working under the Capital Raising Exception Act of the BCSC). Kinship Investments is not an advisory service and does not provide investment advice. This blog represents Lee MacFarlane's opinions only and is not intended to be used as investment advice. Lee MacFarlane and Kinship Investments may or may not hold securities that are discussed in this blog. Please contact lee@kinshipinvestments.com for further information or go to www.kinshipinvestments.com/trustfund.html to view our latest results.
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