Signs of a Crude Oil Top?

May looks to be another strong month for crude, with futures posting a nearly 9% gain since Friday. It opened 2022 at $75.69 and is now trading at $114. That’s a gain of just over 50% so far this year. It’s no surprise to anyone buying gasoline, but how the price of crude oil moves over the next few months is important for many reasons, including Fed policy.

In my analysis of the markets, I always start with the long-term monthly charts because the daily fluctuations are smoothed out, making it easier to identify the major trend.

This chart tracks crude oil prices since 2013, when crude oil rose above $112 in August. Crude oil prices crashed in the fall of 2014 and began a nearly two-year decline. Below the chart is the Volume Confirm which is a combination of volume indicators. It includes the equilibrium volume (OBV) that I have written about in the past.

When above its short-term moving average (MA), it is positive and the cloud is green. When the indicator falls below its MA, the cloud is red and it is negative. Longer term signals occur when it moves above or below the zero line. In September 2014, it turned negative by passing below the zero line, point a. It only turned positive in October 2017, point b, after crude oil was nearly 40% lower.

Volume Confirm remained above zero until March 2020, point c, as it fell during the Covid market crash. The Confirm returned to positive in May 2020 as Crude closed at $35.32. It was only in November 2020 that crude oil rose sharply. In October 2021, crude traded above its monthly starc+ band. It was a sign that crude oil was on the rise. It fell sharply the following month but never closed below its reversal point (dotted green lines).

Crude oil reached a high of $130.50 in March, point d, but then closed the month at $101.20. Crude Oil has broken above its monthly starc+ band for the past two months, which still means it is extended higher. Although a market may remain above or below its starc band for many months, it is eventually followed by a sharp reversal.

The monthly analysis is not yet showing signs of a top as Confirm Volume has continued to make new highs and is not showing any divergence with price. The monthly reversal is now at $84.74, so it would take a June close below that level to reverse the positive trend.

Crude’s weekly chart shows it closed 4.3% higher this week as prices tested the 20-week higher EMA at $104.44 and chart support, line a, over the past seven last weeks. There is the next weekly resistance from March at $116.64 with the starc weekly band + at $136.48.

The weekly OBV, after a nine-week pullback from the high in late October 2021 (see shaded area), the OBV snapped back above its WMA in mid-January. The OBV has been trading above and below its WMA for several weeks, but has remained well above support at the b-line.

Since the early 1980s, I have relied on the Herrick Payoff Index (HPI) as a key indicator to determine the direction of commodity prices. The HPI is simply a mathematical method of measuring the money flowing in or out of a commodity by calculating the difference in dollar volume each day. This is accomplished using volume, open interest and price data.

The HPI chart includes a 21-period weighted moving average (WMA) which was topped with the zero line in mid-January, point d. The resistance at the c line was overcome three weeks later, which confirmed that the money flow on the HPI was positive. The HPI is currently testing support at line c. A move back above the WMA could signal the next sharp rally in Crude Oil.

The two-month resistance, line a, is more evident on the daily chart and Friday’s close reveals that Crude Oil is close to an upside breakout. Based on the May price ranges, preliminary monthly R1 resistance is at $121.04 with R2 at $126.97. The June pivot, which is subject to change after the last trading day in May, is at $109.61.

The daily OBV closed the week on a new high, leading prices higher. The HPI closed at +56.57, so money flow is positive but a strong move above the resistance at the c-line, could precede the upward acceleration in price.

Crude oil and a large ETF like Energy Select Sector (XLE) are significantly higher. Crude Oil has gained 9.4% so far in May, while XLE has been much stronger, gaining 17.8%. Given the strength in Crude Oil, it would take a weekly close below $109.64 to change the positive trend. The level to watch for XLE is the weekly reversal level at $78.38. For June, the outlook for crude oil and energy inventories is higher as there are no signs of a top yet.

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