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May looks to be another strong month for crude as the futures are showing a gain of almost 9% as of Friday. It opened 2022 at $75.69 and is now trading at $114. That is a gain of just over 50% so far this year. This is no surprise to anyone who buys gas but where the price of crude oil is going over the next few months is important for many reasons, including Fed policy.
In my analysis of markets, I always start with the long-term monthly charts as the daily gyrations are smoothed out which makes it easier to identify the major trend.
This chart follows crude oil prices since 2013 when crude oil moved above $112 in August. Crude oil prices broke down in the fall of 2014 and started almost a two-year decline. Below the chart is the Volume Confirmer which is a combination of volume indicators. It includes the on-balance-volume (OBV) which I have written about in the past.
When it is above its short-term moving average (MA) it is positive and the cloud is green. When the indicator drops below its MA the cloud is red and it is negative. The longer-term signals are when it moves above or below the zero line. In September 2014 it turned negative by dropping below the zero line, point a. It did not turn positive until October of 2017, point b, after crude oil was almost 40% lower.
The Volume Confirmer stayed above zero until March 2020, point c, as it dropped during the Covid market plunge. The Confirmer reversed back to positive in May 2020 as crude closed at $35.32. It was not until November 2020 that crude oil turned sharply higher. In October 2021, crude traded above its monthly starc+ band. This was a sign crude oil was extended on the upside. It dropped sharply the following month but never closed below its reversal point (dashed green lines).
Crude oil spiked to a high of $130.50 in March, point d, but then closed the month at $101.20. Crude oil has exceeded its monthly starc+ band for the past two months which still means it is extended on the upside. Though a market can stay above or below its starc band for many months it is eventually followed by a sharp reversal.
The monthly analysis shows no signs yet of a top as the Volume Confirmer has continued to make new highs and shows no divergences with prices. The monthly reversal is now at $84.74 so it would take a close in June below this level to reverse the positive trend.
The weekly chart of crude show it closed up 4.3% this week as prices had been testing the rising 20 week EMA at $104.44 and the chart support, line a, for the past seven weeks. There is next weekly resistance from March at $116.64 with the weekly starc+ band at $136.48.
The weekly OBV, after a nine week pullback from the late October 2021 high (see shaded area), the OBV moved sharply back above its WMA in the middle of January. The OBV has been trading above and below its WMA for the past several weeks but has stayed well above the support at line b.
Since the early 1980’s I have relied on the Herrick Payoff Index (HPI) as a key indicator in determining the direction of commodity prices. The HPI is simply a mathematical method of measuring the money flowing in or out of a commodity by computing the difference in dollar volume each day. This is accomplished by using the volume, open interest and price data.
The chart of the HPI includes a 21 period weighted moving average (WMA) that was overcome along with the zero line in the middle of January, point d. The resistance at line c, was overcome three week’s later which confirmed that the money flow on the HPI was positive. The HPI is now testing the support at line c. A move back above the WMA may signal the next sharp crude oil rally.
The two-month resistance, line a, is more evident on the daily chart and Friday’s close reveals that crude oil is close to an upside breakout. Based on the May price ranges the preliminary monthly R1 resistance is at $121.04 with the R2 at $126.97. The June pivot, that is likely to change after the last day of trading in May is at $109.61.
The daily OBV closed the week at a new high as it is leading prices higher. The HPI closed at +56.57, so the money flow is positive but a strong move above the resistance at line c, could precede upward price acceleration.
Both crude oil and a large ETF like the Energy Select Sector (XLE) are sharply higher. Crude oil has gained 9.4% so far in May while XLE has been much stronger gaining 17.8%. Given the strength in crude oil, it would take a weekly close below $109.64 to change the positive trend. The level to watch for XLE is the weekly reversal level at $78.38. For June the outlook for crude oil and energy stocks is higher as there are no signs yet of a top.