Trader’s Narrative

Today’s market got spooked in the morning with the release of consumer price index data showing a more than expected 0.4% rise for January, Almost all components, including energy, contributing to the increase.

Yesterday crude oil futures (March 08) jumped $4.51 to close at $100.01 and today they reached $100.74 - so what better time to look back at my previous comments about Texas tea.

Last December I wrote that I saw a double top in crude oil, here’s how it has fared since:

The $100/barrel level is proving to be mighty resistance for crude but the more prices butt heads against it, the more fragile that glass ceiling will become.

This is the fourth time that the bulls have attempted to breakthrough but it is the highest they have been able to push prices so far. So the double top I thought I spied last year has now become a potential quadruple top.

When the market was going to hell in a hand basket in the middle of January, I didn’t write anything specifically about energy or oil stocks but if you were reading the blog then, you couldn’t have missed the unmistakable bullish bias.

During the same time, the bullish percent index for the energy sector reached a low of 7.06% !! To put that in perspective, we’d have to go back to the bear market bottom of 2002 to find a lower bullish percent reading. Since it was a full market meltdown, the same was happening for almost all sectors.

In January 2008, as oil stocks were topping, the bullish percent reached a high of 75.29%. In comparison, the current reading is 71.76%, definitely getting up there but still not extremely high. Which is why I think that if you scooped up cheap shares in the January fire sale, here would be a good time to start offloading them.

Crude may breakthrough the magical $100 barrier but right now there is too much frenzied attention around it and it has climbed to far too fast to continue at the same pace without first catching its breath.

If all this talk about “bullish percent this” and “bullish percent that” in confusing you, read:
How To Time the Market With Bullish Percent Charts

Maybe my problem is that I try to understand things. So here I am, amid all this hue and cry about interest rates shooting to the moon in order to contain rapidly rising inflation and I find myself asking, inflation? what inflation?

The CRB commodities index broke down from its long term uptrend line last year and has been going lower since. And gold, probably the most watched gauge of inflationary expectations, has just done the same.

Last friday gold didn’t hold the $665 level which was support provided by the long term trendline (see graph). Instead it easily sliced through in a wide range bar and reached a low of $647.80.

Not the sort of price action that is congruent with an inflationary scenario, wouldn’t you think?

I’ve been wary of gold for a while now. But in any case, bonds have been taken to the back alley and beaten to a pulp. Time to buy the panic?

If there is an opportunity, it’s between now and Friday morning - when the CPI numbers will be released. You know the drill: buy the rumour, sell the news.