Clive Maund has been president of www.clivemaund.com,
a successful resource sector website, since its inception in 2003. He
has 30 years' experience in technical analysis and has worked for banks,
commodity brokers and stockbrokers in the City of London. He holds a
Diploma in Technical Analysis from the UK Society of Technical Analysts.
He lives in southern Chile.
The Energy Report: Energy
prices are very sensitive to international events, especially conflicts
in the Middle East. Do your charts factor in the periodic crises that
impact oil and gas prices as buy and sell moments? How do you factor in
inflation and interest rate movements into your calculations about which
energy juniors look like good buys at any given time?
Clive Maund:
The charts do factor in periodic crises that impact oil and gas prices
as buy and sell moments, but often in a contrary way. The trick is to
gauge when a crisis is at its moment of greatest tension, and while this
is not at all easy, the charts can often be a great help in defining
such a moment. I will give you an example using a recent call on
CliveMaund.com, where the top in oil was pinpointed a day after its
occurrence. Some readers may remember an old saying used on the London
market many years ago, "Buy on a strike." This refers to a strike by
labor, not an oil strike. The underlying psychology of this was that the
time of maximum tension and uncertainty, which was when labor unions
called the workers out on strike, was the best time to buy stocks,
because they would have been falling in anticipation of this, and as
tensions later eased as the situation headed to resolution, they would
rise again. So it is with conflict and tension situations in the Middle
East and their impact on the oil markets.
Some weeks ago, before
the surprise announcement by Putin and Syria that chemical weapons
would be turned over to international regulatory bodies, the oil price
suddenly put in a large prominent "shooting star" candlestick as it made
a new high for its uptrend, which we read correctly as a topping signal
and a sign that the crisis was about to ease. Once it did, as we know,
the oil price dropped away. The fact that it put in such a signal before
the announcement is an indication that powerful, well-connected people
knew that such an announcement was imminent, and traded on it to their
advantage, as is so often the case. We observed their boot prints in the
sand and judged the situation accordingly—and correctly, as it turned
out.
Inflation is not much of a consideration, as it is built into
the prices of just about everything. It really only needs to be taken
into account when you are looking at long-term charts. For example, if a
stock is priced at $30, and it was at the same price 10 years ago, it
is clearly worth less in real terms now than it was back then. With
regard to junior energy stocks, I do not pay much attention to inflation
in making picks, because as I said above, it is a background factor
that is already built into their prices. What matters with interest
rates is not so much their actual level but their direction—their trend,
and their rate of change. Right now we are at a dangerous juncture,
with the Fed fumbling its way forward, trying to keep interest rates low
and retain what shreds of credibility it has left.
TER:
Please explain how quants like yourself use chart patterns to analyze a
stock's trajectory over time. Can you talk about the meaning of some of
the basic chart movement metaphors, such as "head and shoulders" and
"candlestick"?
CM: Most of the technical
indicators that we use to identify good entry or exit points for stocks
are based on plain common sense. Thus, a stock that has been sold into
the ground, and has then formed a base pattern, is likely to start a new
uptrend and recover as the company's fundamental situation improves. On
the other hand, an overvalued stock that is racing away to the upside
and way ahead of its moving averages is much more risky and prone to
correct.
Support and resistance zones on a chart are related to
"congestion zones" where a large amount of stock has traded close to a
particular price in the past. The way it works is this: After a run-up
in a stock, a large number of traders take profits, believing the stock
has done its thing and could reverse. Then, to their chagrin, it breaks
out and rallies to a new high. Having missed the move, they resolve to
buy it back if it should come back near to the price at which they sold.
Their buying potential puts a floor under the price on the next dip,
providing support, which can be identified on charts in advance and
utilized for timing purchases. It works the same in the other direction:
Traders buy a stock in a trading range, expecting it to break out
upside and continue higher, but it does the opposite and breaks down.
Rattled by this, they resolve to "get out even" if it should rally near
the price at which they bought it. Their selling potential caps the next
rally, creating resistance, which again can be identified and used for
timing purposes by the technical trader.
It usually takes time for
a major uptrend in a stock to reverse into a major downtrend. Think of a
stock as a heavy locomotive that needs time to stop and reverse
direction. This is why after major uptrends, top areas form, which allow
time for the so-called smart money to offload their holdings to the
"dumb money." The duration of the top area is of course also related to
the fact that a company's fortune does not usually change from improving
to deteriorating overnight; it is generally a slow process. The smart
money uses the cover of glowing news reports and company statements to
offload their holdings at top dollar, aware that the good times are
going to come to an end.
Such large top patterns can take various
forms. One classic form is the dome, where the uptrend decelerates
steadily, finally peaks and then starts down again, slowly at first but
then accelerating to the downside. These domes are generally parabolic,
reflecting the ebb and flow of sentiment. The head-and-shoulders, which
is very common, is actually an irregular form of dome top. The rising
wedge can be very treacherous for novice traders, who do not recognize
that an uptrend channel that is converging is actually petering
out—losing upside momentum as buying power fizzles out. When these
patterns break down, the result is often a vicious plunge that can
devastate investors who don't see it coming. We spotted this pattern
before silver crashed in September 2011 and positioned ourselves
accordingly.
Triangles can take three forms: symmetrical,
ascending or descending. With a symmetrical triangle, the top line is
falling and the bottom line is rising, usually at about the same rate.
The symmetrical triangle indicates a market in a state of indecision,
and while it is impossible to accurately predict the direction of
breakout, it is usually in the direction of the trend preceding the
triangle. The "fish head," a term I invented, is a type of symmetrical
triangle, where the oscillations decrease more rapidly than usual,
resulting in a curved top and bottom line—its meaning is similar to the
normal symmetrical triangle, the chief difference being that the point
of indecision is arrived at more quickly, leading to a more rapid
breakout.
An ascending triangle has a flat top line, with the bottom line rising. [See chart below] A flat bottom line with the top line
falling characterizes a descending triangle. The ascending triangle is
bullish as it indicates a situation where buyers are raising their bids.
The descending triangle is bearish as is shows that sellers are
dropping the price at which they are willing to bail out.
Below: Ascending triangle formation.
Candlestick
charting is a fascinating and rewarding aspect of technical analysis,
which is based on the fact that price action during an individual day,
or a small number of days together, can provide valuable insight into
the probable impending direction of a stock. As I said earlier, we used
candlestick charting to predict the direction of the oil price before
the chemical weapons announcement a few weeks back [see below chart].
In candlestick charting, the relative positions of the open, close and
intraday highs and lows of a stock or security on a given day or cluster
of days are important factors in determining what is likely to happen
next.
[Below: Candlestick formation indicated likely oil price topping point in late September of this year.]
All
these charting techniques enable careful investors to stack the odds in
their favor and assist investors in determining when a commodity or
stock is at or close to the extreme end of a move and likely to reverse
direction or embark on a new trend.
Chart interpretation is an
art, not a science, and partly subjective, being based on experience.
The emphasis is on being right most of the time, not all of the time
(that is impossible), and on limiting damage where judgement proves to
be incorrect. The effective use of charts involves determining the
probability of envisaged scenarios coming to pass. This does not,
however, prevent it from being highly efficacious in many instances. A
good example is shown below, where it was determined in July 2008 that
oil was set up for a brutal take down, as subsequently proved to be the
case:
[Below: Before and after charts of the July 2008 oil
price drop, which Maund foresaw through his analysis of 50- and 200-day
moving averages.]
TER: How does the domination of the Middle East by a handful of countries and corporations affect the movement of energy prices?
CM:
While big energy companies may be behind wars of acquisition so that
they can gain control of oil-rich regions, once they are in and
established they generally want stability so that they can get on and
pump the oil without interruption to maximize their profits. While price
spikes caused by the threats of unrest and war may produce a welcome
boost to profits, actual wars that cause destruction of their facilities
and disruption of production are not beneficial.
The control of
large areas by the majors results in stability, the sort that we have
seen in Saudi Arabia for many decades, for example. But the danger with
these mega corporations controlling countries and regions, often in
bi-lateral arrangements with local governments, is that giant cartels
are created that result in price fixing. So we can say that the
advantage of the Middle East being in effect controlled by a handful of
western mega corporations is price stability and a tendency to political
stability, while the disadvantage is the potential for these stable
prices to be on the high side, which is of benefit to the junior
companies as well. The junior companies might find it hard to get a
foothold in such areas, however, because of the dominance of the majors,
and are probably better off exploring elsewhere, the exception perhaps
being newly opened-up areas like Iraq.
TER: What
has been the effect this year of large investment firms covering shorts
in the energy markets? Do you have any picks of junior energy firms that
might be rebounding?
CM: This has caused a
sizeable spike in the price of oil relative to other commodities, and
there can be no doubt that Syria had an important role to play in this.
However, with Syria apparently cooling, this has opened up downside risk
for the sector, because a lot of these large investment firms are now
all on one side of the boat. On the other side are the commercials,
which are now heavily shorting crude—and they are not renowned for being
on the wrong side of the trade. The latest Commitments of Traders (COT) charts for natural gas, on the other hand, look bullish.
There
are a few junior energy stocks that look attractive to me at this time,
based on their technical picture. The charts indicate that there's
something going on in Anderson Energy Ltd. (AXL:TSX).
This stock has been pulverized, dropping from a high at about CA$9
eight years ago to the current very low price of CA$0.15. Aggressive
buying caused the price to spike in the middle of the month, but it has
since drifted right back again almost to where the spike started. A
large bull hammer appeared on September 27, suggesting that it will now
start up again. The number of shares in issue is rather large but this
is well-factored into the price.
Arcan Resources Ltd. (ARN:TSX.V)
staged a powerful, high-volume breakout earlier this month but has
since drifted back on declining volume to an attractive entry point,
although it could drift a few cents more before turning up. It will need
to get above its 200-day moving average before an uptrend can get
established, but this could happen quite quickly now. Arcan was trading
at more than CA$13/share less than eight years ago, so it's picking up
from a very low level now. The number of shares in issue is an
acceptable 97 million (97M).
There's strong upside volume in Artek Exploration Ltd. (RTK:TSX),
which appears to have been consolidating for the past year to date.
This strong upside volume has already driven volume indicators sharply
to new highs, suggesting that an upside breakout is approaching, which
will lead to another significant upleg. Shares in issue are a relatively
modest 62M.
Cequence Energy Ltd. (CQE:TSX)
appears to be bubbling under before making a move higher. We saw
aggressive and persistent buying of the stock during the first half of
September on high volume, which drove volume indicators sharply higher,
but it has since obligingly drifted back to a very good entry point at
the support level on much lighter volume. It has been pretty much
downhill all the way for Cequence since it started life back in 2007 at
the lofty price of CA$14, but the latest technicals show that it is
firing up for a significant rally. The number of shares is on the high
side at 210M, but again this is already built into the price
TORC Oil & Gas Ltd. (TOG:TSX)
is at a good price here, especially as the volume pattern and volume
indicators suggest that it is likely to start an uptrend before much
longer. The price has been depressed for several years after falling
back from a high over CA$56 in 2008, but recent heavy volume, most of
which is upside volume, is a sign that interest is building in this
stock. It looks like there is good value here, and the number of shares
in issue is an acceptable 91M.
TER: How is the
short-term life span of fracked wells affecting stock prices? What is
the overall situation for supply and demand in energy markets,
worldwide?
CM: We would expect the short-term
life span of fracked wells to create a more rapid boom and bust cycle in
junior energy stocks, unless a more or less continuous stream of
producing wells can be maintained.
The overall supply and demand
situation for oil and gas appears to be pretty much in balance, which is
why the oil price has been in a trading range for the past two years.
We have seen peak oil and the depletion of existing oilfields, but,
necessity being the mother of invention as they say, we have also seen
ingenious responses to the situation in new ways of looking for oil—for
example, a massive field has been found in the Gulf of Mexico using
special deep drilling techniques, and we have the polar ice cap melting
at the perfect time for exploration to expand there in a big way,
although this is not such good news for polar bears, of course.
Oil
found in more difficult-to-access places is more expensive, and this is
what has encouraged the search for cheaper supplies, resulting in
massive discoveries in the U.S. These new supplies look set to take the
U.S. toward energy self-sufficiency, which would have been unthinkable
just a few short years ago. However, this may also lead to a supply
shock that drives prices lower. This is another reason that the
bearish-looking oil COT charts
are thought to presage a lower price trend, and it is thought that the
oil price was given a reprieve in recent months by the Syria crisis.
Over a shorter time horizon, traders need to watch out for a slump
engendered by rapid economic contraction due to rising interest rates.
As we saw in 2008, sometimes macro factors render the fundamentals of
the oil industry irrelevant. This might be what the COTs are warning of.
TER: Are energy ETFs a good bet? If so, what kinds?
CM:
Energy ETFs are an excellent way to play the energy market. They have
three great advantages. One is that the ordinary investor can avoid the
possibly cumbersome details involved in trading the actual commodity.
The second is that you can also avoid the risk inherent in individual
stocks, and the third is that you can make money on the downside, too,
by using the inverse ETFs available.
Investors have a choice of
leverage with these ETFs. There are straight unleveraged ETFs, which
move one-to-one with the underlying commodity or index; twice leveraged,
which double your gains if you get the move you are expecting (these
are the ones we generally go for); and triple leveraged, which have a
high decay factor, due to being "juiced" by options, etc., and therefore
should generally only be used by professionals, and even then mainly
for hedging, or in rare situations where investors are expecting a big
move in a short timeframe.
The following (long) ETFs and ETNs provide a broad choice: First Trust Energy AlphaDEX Fund (FXN:NYSE), Vanguard Energy ETF (VDE:NYSE), iShares S&P Global Energy ETF (IXC:NYSE), iShares Dow Jones U.S. Energy ETF (IYE:NYSE), SPDR S&P Oil & Gas ETF (XOP:NYSE) and PowerShares Dynamic Energy ETF (PXI:NYSE).
In addition, we have the First Trust ISE Revere Natural Gas ETF (FCG:NYSE) and iShares Dow Jones US Oil Equipment & Services ETF (IEZ:NYSE).
Short ETFs and ETNs of note include PowerShares DB Crude Oil Short ETN (SZO:NYSE), PowerShares DB Crude Oil Double Short ETN (DTO:NYSE), ProShares Short Oil & Gas (DDG:NYSE), United States Short Oil Fund (DNO:NYSE) and ProShares Ultrashort DJ-AIG Crude Oil (SCO:NYSE).
TER: Is there an optimum entry point for energy stocks in the foreseeable future?
CM:
Although technically still in an uptrend, oil stocks as a group have
just stalled at resistance and look vulnerable to reversing to the
downside soon, especially if the key support for Texas Light at $102
breaks soon, as looks likely. Light crude looks set to drop further back
to the high $90-range soon, especially as its latest COT charts look
bearish. Military action against Syria looks to have been put on the
back burner for now. While there is some support in the 1350 area on the
Amex Oil Index, there exists the risk of a deeper reaction back to the
1200–1230 area, where there is significant support, and this reaction
could carry considerably further if we see a sharp rise in interest
rates. Here we should note that rising rates would likely be accompanied
by rising gold and silver prices, as in the late 1970s.
Having
said this, many junior energy plays look strong here and set to rise on
their own merits, pretty much regardless of what happens to the sector
indices and larger oil stocks.
TER: How do currency fluctuations affect oil and gas prices?
CM:
Because oil is priced in petrodollars, the key currency to watch in
energy pricing is of course the U.S. dollar. Countries that have
threatened to cease selling oil and gas in petrodollars, like Iraq and
Libya, have paid a heavy price, so we can assume that the U.S. dollar
will remain dominant into the foreseeable future, although some
countries, like China, are looking for ways to circumvent it. With the
Fed maintaining quantitative easing, the dollar is under increasing
threat of losing its value, which means that oil and gas prices must
move to compensate for a falling dollar.
TER: Thanks you for speaking with us today, Clive.
CM: My pleasure.
Find out how Maund has used technical analysis to make successful precious metals trades in his interview with The Gold Report.
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1) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
2) Clive Maund: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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