Oil At Most Extreme Ratio Since May
The gain in WTI has been impressive after bouncing off a low near $42. As this is being written, WTI is near $46.80.
In my previous post I wrote:
One of the problems with using technical analysis is that it’s too easy for bias to creep in. Anything from the time period selected, to the tools used and where the lines are drawn is an invitation for hidden, or not-so-hidden, opinion to masquerade as fact.
The above chart, however, isn’t built like your typical technical analysis chart. It’s built on a grid starting with a Gann Square, which is designed to square time and price. In addition it uses angled resistance lines based on Murrey Math. The basic angled lines are built on multiples of 1.5625 degrees and are drawn from pivot high and low prices. In short, the chart above is designed specifically to remove bias rather than reinforce it.
While there is always the possibility that price could go higher and penetrate the 25 degree angled resistance line, my Positive / Negative Ratio (PN Ratio) indicates that the oil price is reaching extreme levels and may begin to move lower.
As of yesterday’s close the PN Ratio stood at 0.717697846. The last time this ratio was higher was on May 23rd when it was 0.726087656. That marked a pivot high close of 51.47. After that the WTI Continuation Contract moved from 51.47 to a pivot low close of 42.74 on June 22nd.
While some will point to the declining DXY as part of the equation that represents, in my opinion, the confusion of news with larger cycles, trends and mathematical principles that move prices. Even if the DXY continues to decline, there is a good possibility it finds support near 92.18 which is only about 2.34 below where it is currently. Price doesn’t tend to move in a straight line so it doesn’t make sense to project a single day’s sharp decline in the dollar and draw the conclusion that the oil price must leap higher because of it.
Another measure I use is how far away the daily high and low prices are from what I call the Probable Price Range. For example, on June 2nd the Probable Price Range for WTI was 46.70–53.13. The low price was 46.74 and the high was 48.19. The high price of 48.19 was 10.25% below the high end of the Probable Price Range of 53.13. Extreme levels, such as this tend to signal that price is about to reverse. The closing price for WTI on June 2nd was 47.66. By June 21st price closed at 42.53.
On July 13th the WTI Probable Price Range was 44.26–50.00. The actual low was 44.99 and the high was 46.28. The high was 8.04% below the probable high. Price has bumped up a little since then, but this is not uncommon. I would expect that over the next several days we’ll begin to see the WTI price move lower.
Markets tend to find balance as explained by the Action-Reaction Principle as outlined by Roger Babson and Alan Andrews of Andrews’ Pitchfork fame.
Bottom Line: The WTI Price has moved to extreme levels as demonstrated by the PN Ratio and the distance between the daily high and top of the Probable Price Range. Expect price to move lower.
Disclaimer: Didn’t your Mother tell you not to get your investment advice from random strangers on Medium?