Breakout watch
03/16/18

Traders like to see action, but some traders tend to forget that what often precedes a big move is a lot of inaction. In short, it’s a good idea to keep an eye on trending markets that are suddenly…going nowhere.

Crude oil has wound itself into an ever-tighter trading range in March, with a midpoint in the June futures contract (CLM8) of around $61/barrel—which is also about halfway between its January high ($65.52) and February low ($57.29).

June WTI crude oil futures (CLM8) 11/10/17 – 3/15/18. Daily crude oil chart.

Source: OptionsHouse

Because volatility tends to repeatedly cycle between highs and lows rather than smoothly trending in one direction for a long time, many traders could logically expect crude to break out of its low-volatility consolidation in the near future. But which way?

For many short-term traders that question may not be relevant: Any move out of the range could potentially have enough follow-through to justify taking a position, since traders who guessed wrong on the direction of the breakout would scramble to get out of their positions. Hence, the goal would be to wait for the breakout to occur, trade in that direction, and take quick profits.

But there may be other factors to consider. It doesn’t yet count as a trend reversal, but weekly crude oil supply/demand data released yesterday showed oil inventories increased 5 million barrels last week. It’s the third consecutive increase and a continuation of an uptick in inventories that began in January, which runs counter to an overall decline that dates back to last April:

Crude oil inventories, 3/16/16–3/14/18

Source: OptionsHouse

Crude oil prices can move on a range of factors—and the market is typically very susceptible to shocks from geopolitical turmoil—but in and of themselves, higher crude inventories (that is, oil sitting around waiting to be used) reflect higher supplies and may imply downward price pressure (or, perhaps more accurately, a lack of upward price pressure). During the last sustained inventory uptrend, from roughly late-October 2016 to late-March 2017, crude prices moved sideways in a wide range and posted a slight loss for the period.

Also, crude prices have slightly favored the downside over the past two weeks, in that the market has made noticeably lower lows  and only slightly higher highs—a possible sign of diminished bullish enthusiasm.

Either way, the market seems poised to make a move.

Market Mover Updates: Interesting consolidations have also appeared in a couple of stocks previously covered in this space.

Southern Copper (SCCO) has held its ground in recent days despite the broader market pullback, forming a tight consolidation pattern near its recent highs (see chart below, left).

Southern Copper (SCCO) 1/22/18–3/15/18. Home Depot (HD) 10/23/18–3/15/18

OptionsHouse

Meanwhile, although Home Depot (HD) rallied 24% after “Home Depot gets it done” on November 16 to its January high, the stock has had trouble rebounding from its February correction (chart above, right). Over the past couple of weeks HD shares have made successive lower swing highs (even more notably than crude oil) and have traded in an increasingly narrow range very close to their correction low around $175.50, a chart picture that looks a lot like troops massing at a border.

 

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