7 Technical Indicators to tell when the Crude Sell Off is Done

Is Oil back at $100 and nobody told us? You would think with the Bloomberg headlines “Oil is on a Gigantic Tear,” and “Oil Enters Bull Market” that the down trend in Oil Prices may be over. Turns out, this is an example of why you sometimes need to read more than just the headlines, in one of those read between the lines / apply some context moments. Here’s Bloomberg’s context:

“After plunging for months, the price of oil has boomed over 20 percent in just the last three trading days. Last Friday it was just over $44 per barrel. Today it’s selling at nearly $54 per barrel.”

Now, Tuesday’s highs were in fact in the $54 range (even though it ended up the day in the $52 range) and the “bull market” math does work out if you buy into the sacred 20% level for signifying a bull market. But it sure doesn’t feel like a “Bull Market” in Crude Oil after the unbelievable veracity of the sell off, does it?  There should be some metric which adjusts the ‘bull market’ level for the just lived through ‘bear market’ levels.

Which leaves us with the question, how can you tell when these articles are just stirring the crude oil pot, and when is the market actually coming out of its months long downturn? How do professional trend followers tell when a trend is over? Or about to be over?

Is it as simple as watching until the market breaks through a carefully drawn trend line on your chart? It can be. But the professional traders who collectively run billions of dollars in managed futures programs with trend following models, actually use a few different methods for determining when a trend is over; looking at everything from moving averages to swing highs and lows, to directional indicators to relative prices.

Using some of these tools, we can look at just how far away (even after this three day “Bull Market”) Crude Oil WTI futures are from signaling an end to the down trend. PS – we assumed a closing price of $52.98 for the numbers below (that’s what was on our screen at the time we started writing).

  1. Moving Averages – some models are as simple as believing a down trend exists until prices move above a moving average of past prices, with typical values ranging from 50 days to 200 days.  We’re currently:
    • 2.92 points away from the 50 day moving average, or $2,942 dollars per futures contract
    • 17.40 points away from the 100 day moving average, or $17,409 dollars per futures contract
    • 33.43 points away from the 200 day moving average, or $33,437 dollars per futures contracts
  2. Moving Average Cross Over – other models smooth out the daily swings (like the past three days), a bit, by considering a trend in place until the moving average of prices crosses above a different (usually longer) moving average of prices. This is a little more difficult to show how far we are away from, but we gave it a stab…
    • It would take 35 straight days of +1% gains for the 50 Day Moving Average to cross over the current 100 Day Moving Average
    • And 87 straight days of +1% gains for the 100 Day Moving Average to cross above the current 200 Day Moving Average
  3. Price Channels – These are a little more complex, and are usually used in conjunction with some moving averages, and – somewhat countintuitively – are used as entry points (down trend has begun when breaking below the bottom of the channel), but they can be used at times to signal the end of a trend. The top of a basic price channel based on the 100 day moving average of prices and 1 standard deviation of prices above that level would be
    • 12.3 points away for the top of a 50 day price channel (1stdev above 50d MA)
    • 34.3 points away for the top of a 100 day price channel (1stdev above 100d MA)
    • 52.6 points away for the top of a 200 day price channel (1stdev above 200d MA)
  4. New Highs – Depending on what time frame you’re looking at, sometimes a trend is over when something simple happens, like a new 3, 5, 8, 13, or 21 day high, calendar month, YTD. Or multi year high. We’re currently:
    • AT new 3, 5, 8, 13, and 21 day highs. (Those numbers seem familiar, they are Fibonacci sequence numbers)
    • AT monthly and YTD highs.
    • 25.73 points away from 3 month highs
    • 52.7 points away from 6 month highs
    • 54.97 points away from 12 month highs
  5. Rate of Change – While more commonly used as a confirming indicator on whether to enter a trend, the Rate of Change indicator (today’s price minus the price x days ago) is essentially the numerical equivalent of a trend line on a chart. When negative, the trend line is pointing down, when positive… the trend line is pointing up. To push the rate of change into positive territory, signaling the end of the down trend, we would need:
    • 14 straight days of +1%, and 11 straight of +2% to turn the 50 day ROC positive
    • 40 straight days of +1%, and 24 straight of +2% to turn the 100 day ROC positive
    • 70 straight days of +1%, and 35 straight of +2% to turn the 200 day ROC positive
  6. The ADX (Average Directional Index) – this is sort of an average of the ROC, and can be used to confirm when a trend is done, or when it is about to be done; with a market considered trending when the ADX is above the 25 level, not trending when below 20, and potentially weakening when above 20 and decreasing. As proof of concept, the 14 day ADX on the Crude Oil went from 19.49 to 49.5 from July to Jan 13th. Where are various ADX levels currently:
    • The 14 day ADX is at 34.41, and decreasing (= down trend in place but weakening)
    • The 50 day ADX is at 31.02, and still increasing (= down trend strong and in place)
    • The 100 day ADX is at 16.72, and still increasing (= not a trend on this long of a time frame)
  7. Draw some lines – ok, no professionals we know are actually doing this and managing real money with some lines on a chart, but it can be fun. Looks like the trend is intact from the Oct-Dec trend line, and has been broken on the Dec-Jan trend lines.

    Crude Oil Chart

(Disclaimer: Past performance is not necessarily indicative of future results)

P.S. — If you’re thinking this is the right time to play the bounce in Crude, the popular ETF $USO isn’t the answer.

One comment

  1. Hella timing on this since crude is down nearly $4.5 today.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.