Energy Fundamentals and Technicals Finally Align…

Hey There Income Hunters,


Such a big part of life is getting in sync… I felt like I was always working to get in sync with my wife or my kids or my colleagues at work… 


Or, getting my lower body in sync with my upper body on the golf course…. Just kidding…  Lol…. 


The energy sector has been frustrating for weeks… It probably frustrated the bulls just as much as the bears… there were days that it felt horrible and others it felt like incredible… 


However, it was volatile in a wide range at first then it just kept coiling tighter… I always looked for markets in that condition where you could play for the breakout…


Two things kept me in a long position in about a handful of energy stocks….


  • One was that volatility kept moving lower, which historically is indicative of a market that wants to continue higher …


  • Two was  the volume was higher on the days when prices rose, which gave me confidence that the trend would continue higher … 



So, yesterday we received good news from the International Energy Agency (IEA), which reported:


  • Still having some concerns over the global economy, with the number of cases surging in Europe and major oil countries like India and Brazil …

  • Oil supply may still ramp up in the next couple of months with Iran especially opening up supply lines…

  • However, they are calling for dramatic changes in the second half of the year as nearly 2 million barrels of extra supply may be needed to meet expected demand growth …

The market certainly liked the forecast for the second half. Crude futures reached a high of $63.44 before closing at $62.75 …


Energy Names I Purchased


I picked up Baker Hughes (Ticker: BKR) last week. BKR is a large oilfield service company. I had them trading at a 30% discount to their fair value price. BKR was up 2.4% yesterday.


I also purchased Schlumberger Limited (Ticker: SLB). I have been watching them for a while and when vol traded off in this last consolidation trade, I purchased $30-strike calls outright in June.


USO Implied Vol is Cheap, Cheap, Cheap …



A few things about the US Oil Fund ETF (Ticker:USO) chart above … 


Today was a hat trick of positives for USO: higher price, lower volatility and higher volume.


That is the most positive combination of those three factors since higher volatility is tightly correlated with price drops and higher volume is confirmation of strength to the trend …


We had a similar setup in December 2020 and the market trended higher for three months. 


I don’t think we’ll see that from these levels — but I do think we could see new highs towards the $70-$75 price zone.


Bring It Home


The market took a well-earned breather yesterday and I think it has plenty of room to run.


There is a lot of money on the sidelines ready to go into the market and into the economy. We just have to keep pumping out those vaccines….


Hopefully the next big rally in commodities can be led by silver and gold. I have been patiently waiting for that one — patience is my strong suit.


Live and Trade With Passion My Friends,


Griff

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