Volatility & opportunity in the energy sector

March 21, 2018 08:00 AM

Quant Cycles (formerly called the Cycle Projection Oscillator) is a technical tool that uses proprietary statistical techniques and complex algorithms to filter multiple cycles from historical data, combines them to obtain cyclical information from price data and then gives a graphical representation of their productive behavior. Other proprietary frequency domain techniques then are employed to obtain the cycles embedded in the price.

ExxonMobil (XOM) 

ExxonMobil (XOM) had struggled for much of 2017 after setting a high above $90 per barrel in December 2016. But as crude oil began its rally in the summer of 2017, XOM jumped on board to test highs not seen since the later 2016/early 2017. This all ended when equities markets corrected sharply in early February. XOM felt a double whammy as crude corrected on the heels of the sharp decline in equities. The Quant Cycle proprietary indicator (formerly known as the Cycle Projection Oscillator or CPO) indicated XOM was in a down cycle and close to overbought territory when it reversed lower. 

The good news for traders is the sell-off has pushed XOM near oversold territory just as the indicator is turning positive. It is not predicted as a sharp move higher, but if XOM remains at current levels the rebound higher could be significant. 

Chevron (CVX)

The Quant Cycle picture of Chevron (CVX) is extremely similar to that of Exxon, but with some minor differences. Chevron outperformed Exxon for most of 2017. Price action has been nearly identical in 2018, but the Quant Cycle indicator does not expect CVX to bottom until early April. While the current oversold condition may mean that CVX will rebound above its current price of $113 before you read this if it remains at that level or continues to slide lower it will be a tremendous buying opportunity in early spring. 

Crude oil 

Last month we highlighted a tremendous — albeit a touch premature — shorting opportunity in crude oil as indicated by the Quant Cycle indicator. That downward cycle is expected to persist through most of April before turning higher in the spring. The Quant Cycle indicates that there is more room to short crude oil despite crude peaking in late January and dropping more than 10% by Feb. 14. The indicator is not close to being oversold and the weakness is expected to extend well into April. At that point, the Quant Cycles turns higher. 

Heating oil

Last month we provided a perfectly timed shorting opportunity in heating oil. The Quant Cycle indicated heating oil had just turned lower and would have had a significant sell-off. Right on cue, the market tanked in February, dropping roughly 15% in two weeks. This move has put heating oil close to oversold territory. The problem for traders is the Quant Cycle is showing continued weakness through the end of April. Any rebound in the first quarter should be seen as a shorting opportunity. The market is expected to turn in May or June. No long position should be considered until then. 

Natural gas

Natural gas has been extremely volatile in the first six weeks of 2018. It has railed from well below $3 to more than $3.60 and back below $3. Its current downtrend is expected to persist through most of March based on the Quant Cycle indicator, but natural gas is near extremely oversold territory, so your window to short is probably over. That's OK as the Quant Cycle expects natural gas to enter a major uptrend early in the spring. This move should take out the highs from late January and peak sometime in late spring. Natural gas tends to have big swings, so look for extremes at these key turning points. 

Unleaded gasoline (RBOB) 

Like the rest of the complex, unleaded gasoline has sold off sharply in February, but unlike the rest of the complex, the Quant Cycle indicator expects RBOB to continue to drop through the first half of 2018. The Quant Cycles shows RBOB dropping moderately through the first quarter before entering into a sharper downturn in late spring. Unleaded gasoline usually rallies in the spring during the switch to summer gas blends, which should provide a strong shorting opportunity for RBOB.   

About the Author

John Rawlins is a former member of the CBOT with more than 30 years of experience in trading and research. He co-developed the Cycle Projection Oscillator, which has been featured in Futures and numerous research reports, with an aerospace engineer to identify the dominant cycles in a data stream and project them into the future. Reach John at johnrawlins@msn.com. @cpopro1. You can reach John at johnrawlins@msn.com.