Trading the oil price

It seems that there are a ton of people out there trading the oil price in some way or another. Most people of course have either been getting involved with Sasol or have been thinking about it. We’ve received a ton of requests from all over, from people asking about the oil price and particularly about Sasol. We’ve written a few longer form articles for Finweek explaining our bullish view on the oil market as well as other energy markets and mentioned a few stock and ETF picks in both March and November of this year (2020). So, we won’t be getting into the details on the blog today, but if you would like to request a copy of the articles, please contact us and we’ll happily send you copies.

Offshore trade ideas
S&P500 (SPY)

The S&P500 (charted here using the SPY ETF) has been consolidating around the upper end of the larger consolidation we’ve been tracking over the last few weeks. Although SPY did not take out the intraday highs printed a few weeks ago, it has managed to close at an all-time high. Our bias is currently bullish and we’d like to see a break higher out of this consolidation marked in light pink.

Nasdaq (QQQ)

We’ve been keeping an eye on the pennant on the Nasdaq (charted here using the QQQ ETF). We note that although Friday was not a record high, as was the case with SPY, it has broken out of the formation. That said, it did not form the most convincingly bullish candle, seeing at it’s a spinning top after a gap higher (so could suggest exhaustion). We would have liked an opportunity to buy it off the lower support line (inside the pennant formation), although it seem that we might not get a chance too. Long positions taken here offer a tight stop loss and thus a very good risk-reward. We just need to be careful that this does not turn out to be a fake breakout.

Tesla (TSLA)

TSLA is not the best bellweather to use as an overall representation of the tech sector, although it certainly is a stock that many have been chasing. The stock has recently been included in the S&P500 index as well, and thus there has been frenzied buying as index tracking funds became forced buyers. Friday’s trading action saw the stock close at an all-time high, although after leaving a gap at the open and forming an inverse hammer. Should the stock gap slightly lower at the open tomorrow, this could turn out to be an almost perfect shooting star formation. Keep in mind that much of the ‘forced buying’ is likely behind us as participants front-running index inclusion are now no longer interested in chasing the stock higher. A stop loss placed just above Friday’s high could give a great risk-reward, counter-trend trade down to $450-ish.

EURUSD

After a relatively long period of consolidation, it would seem that the EURUSD is starting to break out of the rectangle formation. In this context it is a trend continuation formation and thus we believe it likely to see the EURUSD move toward $1.3000 in the coming months. We note that this would likely be very supportive of commodities prices (although studies suggest that this correlation is only short-term in nature).

Trading the oil price
Dollar Index (DXY)

We’ve switched to a weekly time frame to bring context and significance to the break of the consolidation on the DXY chart. We’d expect a move (eventually) to the 89 level (with initial support at 91). A prolonged period of USD weakness is likely going to benefit emerging markets and commodity prices. Perhaps not ‘safe havens’ such as gold, but rather industrial metals, minerals and soft commodities.

Trading the oil price
USDZAR

Given the context of the DXY above, it comes as no surprise that that USDZAR continues to strengthen toward that R14.50 level. Once again, in the very short-term there could be a retracement towards R16.00 as the breakout below R16.16 can be retested. In the medium-term though, the trend toward a stronger ZAR seems firmly in place.

Trading the oil price
Brent Crude Oil

Starting with the daily chart, we can see a clear breakout of the down trend line we’ve been tracking over the last few months. We also note a bullish crossover of the shorter-term (20 day and 50 day) moving averages, as well as price moving strongly away from the 200 day moving average. Momentum wise, the MACD has moved above the 0 line and the stochastic remains in a bullish configuration. In general, a pullback would be nice, although it appears that oil (and energy at large) has moved back into a bull market.

Trading the oil price

In order to set a price target for brent crude oil, we need to look at the weekly chart. Here we can more easily see the significance of the down trend line break. We also note that weekly momentum as indicated by the MACD and Stochastic oscillator are both in bullish configurations. We thus expect that brent crude oil will go on to test the 200 week moving average near the $60 a barrel level in the coming months.

Trading the oil price
South African trade ideas
Sasol (SSL and SOL)

Let’s start with SSL (the Sasol ADR listing on NYSE). We believe that this listing has been a bit of a price leader to the local listing (SOL). We therefore would like to ‘take our lead’ from how Sasol is trading in New York and apply those observations to our local JSE listed SOL. We pointed out last week that SSL had broken the 200 day moving average and could potentially be starting a bullish trend. That observation is confirmed again this week as we now see a bullish crossover of both the short-term and the long-term moving averages. Both the stochastic and MACD oscillators remain in bullish configurations. We have to watch the gap it left rather carefully as we cannot yet tell if it is a breakaway gap or not. We would use a gap fill (and retest of the 200dam) as an opportunity to add to longs.

Trading the oil price

To illustrate the significance of the break of the 200 day moving average, and the simultaneous crossover of all three moving averages, we’ve included a chart showing more data. This recent move snaps a two year downtrend.

Trading the oil price

Looking at the local (JSE) listing (SOL), we start with the weekly chart. We would like to see price make a new high in order to confirm the establishment of a bullish trend, by closing a weekly candle above the R158.40 level. From a weekly momentum perspective, there does appear to be a clear shift towards bullishness. The light blue box around the R400 level is in fact a gap left on the daily chart and could serve as a potential price target.

Trading the oil price

Lastly, looking that daily chart on the JSE listed SOL, we see further confirmation of bullish momentum. It would be nice to see price retest converged moving average support so that we can get a chance to add too (or initiate new CFD) long trades.

Trading the oil price
ABSA Group (ABG)

Although the overall expectation for the week ahead is bullish, things do not have to happen exactly in the order or time frames that we expect. A move down to retest the break above the 200 day moving average would not negate the now bullish trend, but could serve as a great entry for a new long trade.

Anheuser Busch Inbev (ANH)

Currently there is no trading signal here, although keep a close eye on that range as a break higher would trigger a long.

African Rainbow Mineral (ARI)

Nice clean bullish break in a well established uptrend. Momentum oscillators are all in billish configurations as well. ARI is looking good.

BHP Billiton (BHP)

A nice breakout from a bull flag formation, along with a move above all moving averages and a hammer candle formation made on Friday. Combined with the DXY narrative and with support from oil prices, BHP is looking really solid.

British American Tobacco (BTI)

Two hammers and potentially a stochastic buy signal. BTI bounced off the support and might be making a higher low. Nice high risk-reward long trade from here.

Clicks Group (CLS)

It might be a little too early to jump on the long trade immediately, although if CLS can hold the blue trend line it might be worth taking. The beginnings of bullish divergence is clearly present. We just need to see price find some support and perhaps a bullish candle formation before we can commit to a swing long here.

Kumba Iron Ore (KIO)

This inverse head and shoulders formation we’ve been tracking is on the verge of failing. Once the upper limit of the right shoulder is breached, we can comfortably say that this formation has failed. As a rule of thumb, there are very few signals as bullish as a failed head and shoulders pattern. Given the DXY context mentioned earlier, we are starting to believe that KIO could rip higher once this R550.00 level is decisively broken.

Life Healthcare (LHC)

Tight stops on the long trade here. Below R15.40 and this trade is off the table.

Nedbank (NED)

Watch the bull flag formation here. We’d be happy buyers off the 200 day moving average, or once the bull flag has broken.

Netcare (NTC)

NTC seems to be holding the support level rather well. Initial target is the top of the range (R14.50).

Old Mutual (OMU)

Another financial stock breaking and holding above the 200 day moving average. This stock is looking pretty decent for a long-term equity investment entry. A break above R13.00 would trigger a double bottom with a price target of R18.00 as well.

Telkom (TKG)

With some luck we’ll get a change to buy again off the purple trend line, still targeting the marked levels. Keep in mind, R38.05 has to be broken in order to confirm the trend change.

*Please note that these trade ideas form part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.


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