Category: Weekly Detail

Some interesting developments in the trade this spring. 1) as a contract expires there is a substantial premium afforded to the upcoming prompt. This premiums sets the stage for a high before the weakness and selling smacks the prompt back into the range (discussed here and the Daily) that has held the market for months. 2) declines have taken the market into range and has created a complacency to the trade (note the Bollinger Band study below).

When this complacency (lack of volatility) occurs in the market- I is not likely to last for very long and creates an environment inducing potential volatility. The difference between the high 2 standard deviation band the lower band is under $.37. It is unlikely that this will hold for very long and the markets premium afforded to the upcoming months and winter will all pressure a resolution to the complacency. Should prices break down and the premiums afforded to the differed contracts come down- the lower band will be broken ($1.579 this week) and volatility is likely to increase. Should prices break above the high band ($1.945 currently), this will likely add significant volatility. Prices have not brought any indications of which scenario will occur — hence the complacency.

Trade in the July prompt contract last week broke down and through the previous lows established in March, similar to the action in the May and June contracts when they became prompt. Last week’s breakdown was immediately supported back up to previous resistance at $1.86 before decline into the weekly close. The July trade is met with weakness early as the prompt month (usually either side of Memorial Day) consolidates finding its footing for a rally in the middle of the month (usually between the 14th and 20th), but rarely extends it’s mid – June rally into expiration (the last time was in ‘16 before that in ‘12). 

While the prompt is showing weakness, the continuation of prices remains in the recent range between $1.70 and $1.90 and last week stayed within the high and lows of the previous week. It did break below the trend line from the May daily lows, which suggests additional declines early this week (see Daily). Monthly volume declined in May for the second straight month, suggesting a lack of enthusiasm for dramatic lower prices. The lack of volatility is beginning catch my attention but remains neutral.

Looking at the charts over the weekend and found some interesting trends that have been developing since the lows were printed in the middle of March and retested at the end of March. Notice on the Weekly chart above, the market has now performed three (if you include last week’s mild run) distinct rallies only to succumb to selling pressures. These selling pressures have taken prices down but the lows from each decline has had a higher low. If you look at the trade action before the March low, any rally was pounded and developed a lower low after the failure of the rally since the Q4 high on the chart.

A similar trend is seen on the Monthly chart (albeit for only two months), with the May low staying above the April low. This subtle trend change does not eliminate the potential for additional declines, but rather is a subtle indication by the participants that interest in extending beyond the March, lows seemingly runs out of steam.

The trade last week followed the historical norms fairly well. The market had a pre-holiday rally that took prices just shy of the previous week’s high, only to find the appropriate selling and declines into the Holiday itself. Depending on how the positions are set- it is likely that there will be more weakness in the coming two days. That said, there has often been a short covering rally during the five day expiration process that has not occurred yet.

The trade in the June contract has created some interesting issues. While the Q2 rally has taken prices up to the 200 Day SMA and two standard deviations above the 20 week SMA, suggests that the Q2 high has occurred and currently met the historical averages. The twenty – year average of rallies from the Q1 low to the Q2 high is 47.6%, the five year is 33.3% with the lower numbers generated from the lower numbers in 2018 and 2019. The current rally from the Q1 low stands at 42.3% – well with in the norms. The only problem that keeps from confirming that is the average number of weeks to transition to the Q2 highs is substantially greater than the current six weeks.

Prices broke through the support tend line and look like additional tests of support down to the range from $1.59-$1.51 seems to be imminent before the upcoming expiration. I find it interesting that one trading house limited all trade associated with the June contract to closing positions. The only time I have seen this type of limiting event happen was on the close of the May Crude contract. Not sure what this means, but there is clearly concern for the potential of volatility. Speculative shorts on the break below trend support allowed for additional positions as they add an additional 36,000 contracts expecting lower prices during the summer. This analysis has supported from the narrowing in the spreads between the summer prompt and winter contracts.

Longer term analysis brings nothing to the supportive table and also suggests additional declines coming, but shows no type of breakdown potential that will break the earlier lows at $1.519. This is still a range trade environment that seems to be heading to the low side of the range. Last week’s decline occurred with gains in volume and open interest, discussed above surely suggesting additional declines coming. While the prices look bleak There is still the potential for the Q2 high to respond higher than the early May gains.

What can you say about a market that test the 200 day SMA and the 40 week SMA all on the same day and then promptly reverses lower to close the week with a lower low breaking the recent trend activity. I can tell you one thing you can’t say is bullish. That being said, each progressive day the declines were on lighter volume — not exactly the bearish indication that bearish folks would want to witness. Through Tuesday (the latest CFTC report on Friday) showed additional speculative fund covering positions and open interest was down for the week (very slightly). I had seen the press that funds had come in on the declines, which, from the data is not supportive of that type of claim.

From the longer term perspective — the next few weeks will be important to witness and trade. Still in the old range (in spite of the expansion last week) and the market seems to be looking for fundamental information to propel higher or break below the major support. I was interested in the break above resistance but it was on short covering and not sustainable (as discussed here last Thursday). Would prefer a break out on higher volume and gains in open interest to confirm a bias change. Until that confluence of events occur- it is probably economically wise to work the range.