Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
Consumers and drivers are grappling with rising oil prices…
Oil is nearly $100 a barrel, and drivers feel the pain at the pump. Prices are now regularly $1 or higher per gallon than they were just a year ago.
It’s very different from April 2020…
Back then, the demand for oil collapsed as the pandemic peaked… you couldn’t even give it away. That was when oil price futures famously traded negative.
Since then, motorists’ pain has clearly become oil’s gain…
In its Q4 results released on February 1, Exxon Mobil (XOM) saw revenue jump 80% compared to last year.
The cash flow was so strong (its highest in almost a decade) that it was able to cut debt. Exxon also announced plans for a share buy-back.
And that was before tensions began to increase in Ukraine…
While the rest of the market took a beating in January, oil prices rose over 15% this month.
As you can see in the chart below, that had Exxon shares rally to a fresh high (putting it up around 80% compared to a year ago)…
Exxon Mobil Corporation (XOM)
You can see the strength of Exxon’s rally from this January. The 10-day moving average (MA – red line) broke strongly above the long-term 50-day MA (blue line).
The sharp rise in Exxon petered out after it peaked on February 7 (six days after its earnings results). For the past couple of weeks, Exxon’s shares have drifted lower despite rising oil prices.
And there’s a reason for that…
In the lower half of the chart, the Relative Strength Index (RSI) shows that throughout this recent rally, Exxon traded well into overbought territory (above the upper grey horizontal line)…
Meaning that Exxon shares had skipped too far ahead of the oil price. With buying momentum running out, Exxon shares rolled over and traded down.
The RSI is approaching another key level after falling lower… Its 50% support/resistance level (green line).
Take a look…
Exxon Mobil Corporation (XOM)
For Exxon to turn around and rally again from here, the RSI will need to stay in the upper half of its channel (above the green line). A bounce off the green line (support) could soon see increasing momentum push Exxon back to retest its February 7 high.
If the RSI breaks down below support, Exxon’s retracement will need to fall further.
But while the unfolding situation in Ukraine will remain a key focus of the news, don’t forget there are multiple other factors that ultimately determine the price of oil…
Anything from production levels decided by Aramco and the Organization of the Petroleum Exporting Countries (OPEC) to the ongoing regular disruptions we see at refineries could have an effect on oil prices.
Bloomberg reported this week that over 10% of Gulf Coast refining capacity was already out of action due to ongoing maintenance and repairs.
We can’t forget how the economy’s strength (or otherwise) plays a big part in demand. Oil has a history of over-shooting… and after such a strong ramp-up, anything that opens the pressure release valve could see the oil price cool down (and Exxon cool further).
The good news is that it will continue to offer up plenty of trading opportunities.
So don’t let the headlines pull you in, and always keep your eyes on the chart.
Editor, Trading With Larry Benedict
What are your predictions for oil prices?
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