Oil: Ignore directional bias at your own peril

by Terry Kinder, Bullion Directory

Andreas Clenow just don’t like technical analysis, or at least the fringe kind.

The next step is the outright lunacy. The world of utter fantasy. You might want to drop some acid before going down this route to help the suspension of belief.

Are technical analysts just howling at the moon?

Are technical analysts just howling at the moon? Image: pixabay

You see, there are these magical numbers that govern the fate of the universe, which control everything in the world, from the formation of galaxies to the horns of goats to the behavior pattern of humans and by dividing these magical numbers found by a genius Italian rabbit counting mathematician named Leonardo a few hundred years ago you get equally magical ratios which you can use to predict stock price moves to the exact decimal and make tons of money, if you just buy the right books and courses first.

When I glanced up from my crystal ball and read the above, I fell of my stool, dropping my magic wand into my vat of newt eyes.

But, seriously, I can understand some of the criticism of technical analysis. It isn’t hard to find misapplications of technical analysis. Give me about 10 minutes and I’m pretty sure I could find 2-5 very salient examples.

On the flip side you have technical analysts who argue that technical analysis stands on its own. Jeremy du Plessis, author of The Definitive Guide to Point and Figure, argues (and I’m paraphrasing) that you don’t need fundamental analysis if you’re using technical analysis. He, and many others, put forward the idea that the information brought forth through fundamental analysis is already embedded in the price. Furthermore, du Plessis believes that fundamental analysis is often too late to the party and thus of little use to making decisions to buy or sell.

I’m sure many would vehemently dispute du Plessis’ point of view. Personally, I agree with much of what he says. At the same time, I also understand Clenow’s point about some of the fringe elements of technical analysis. I have encountered some of the “moon traders” and found their methods to be wanting.

Perhaps some technical analysts see Fibonacci numbers behind every tree. However, I do think that technical tools based on the work of W.D. Gann, Fibonacci, Alan Andrews, and others work, primarily, because they follow certain underlying mathematical principles. The fault is often in misapplying the tools. If you ignore important pivot points, use tools hoping to prove what you already believe to be true, or simply don’t take the time to check your work, you’re going to get inferior results.

Which, brings us round to crude oil – specifically West Texas Intermediate (WTI) prices. There is currently an interesting dichotomy amongst analysts studying the oil price. Some argue that oil production is far exceeding demand and, therefore, the price must come down to perhaps $40.00 or even $30.00 to $35.00 per barrel.

Others, myself included, think that oil may be at or near a bottom, although certainly that won’t be something we can know until some date in the future. Neither position is necessarily unreasonable, but more likely than not, only one position will be closer factually than the other. The question is, which one?

My purpose here is to restate some of my arguments for why I currently view the idea that oil is at or near a bottom is the highest probability outcome. Additionally, near the end, I will look at an additional tool provided by Mr. Clenow that I think will strengthen the argument for a bottoming oil price. Mr. Clenow’s tool is something that both technical and fundamental analysts should be using it because, as he says,

The shape of the term structures can indicate a directional bias. Ignore it at your own peril.

But, more about that later.

The oil price is finding support

It’s pretty easy to construct a disingenuous argument against this first point. I have seen some argue that since the oil price has declined, while others said it would find support, this means any current evidence of price support is invalid. Unfortunately, this disingenuous argument ignores a few things:

A) Support levels aren’t as simple as drawing a line on a chart or assuming that oil has to fall to the thirty dollar range just because it did six years ago. That doesn’t mean it can’t happen. However, I think this could be a case where the simplest construction isn’t necessarily the best.

The oil price has found support multiple times on the blue line.

The oil price has found support multiple times on the blue line.

In the chart above we have used a Pitchfan – a combination of a pitchfork and Gann Fan. You may notice that price has found support several times over the years at the support level represented by the blue line. We could look at that fact in at least two different ways. First, it’s a good support level, and the price could continue to find support there. Second, price keeps testing the level and , eventually, could break below support. Certainly, either view could be argued reasonably. Given that, let’s take a look at another form of support we outlined in Oil Priced in Gold May be Near Bottom.

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