uso dec 24 2014xle dec 24 2014

Everybody seems to be dead sure that oil and oil stocks can only go up from here, and that this is an opportunity of a lifetime. After all our appetite for oil simple cannot be satiated as there is always another Hummer to buy, a pool to heat or an exotic destination to fly to. This may be true in the long run but not necessarily at every point in time. We have had fairly recent lows in oil at $10 and $30, much lower than now. Also, apparently, the economic concept of pricing something in the margin in the context of an oligopoly, is not understood at all. That a lousy 2 mln. barrels of overproduction on a daily need of about 90 mln. barrels can cause a 45% price drop is simple not believed. The problem here is that probable only a very small fraction of the commentators have ever bothered to study the fragility of an oligopoly’s equilibrium. It is not at all like the marble in the salad bowl. Instead it is the marble on the salad bowl after it is turned around.

In any event when in the minority it is important to check your facts even more conscientiously than normal. Therefore we have added USO (an ETF that is a proxy for oil) and XLF (the S&P sub index for energy companies). The USO displays a clear gap. Using our the-gap-is-often-in-the-middle approach we have to assume that we are not near a bottom yet. The EW count also suggest that we need at least one more 5th wave but perhaps more than one if we start the thing of with a series of 1-2’s (not shown), i.e. we may just be in wave 4 of 3!

   Looking at the XLE we also have to assume that we are not near a logical bottom, the first serious one is at $55. So we will stick with the view that this is not over yet and that Alberta may be down the proverbial creek without a paddle. At least they are in good company.

Below is the oil future updated to this morning;

oil dec 24 2014