- New Science in old markets -

Crude makes a top extension, £/€ makes a bottom

Crude oil futures made daily-scale top extensions at the close of Friday’s trading in both WTI and Brent. This was also a turn day, as published in the June 3rd edition and the combination means that we automatically recommend selling short, at market:

Crude oil top extensions

 

This is obviously extremely dangerous as the Middle East is currently ablaze but we are not deterred. The situation in Iraq is descending quickly into chaos but there are some reasons to be sceptical about the level of panic:

  • The neighbouring country of Syria is not a significant oil producer but their civil war has been waged just across the border with Iraq for a long time. That means that oil prices probably already have a good deal of ‘risk premium’ built in.
  • Most Iraqi oil comes from the areas around Kirkuk in the North (half a million barrels a day), which is calm and in Kurdish hands or from Basra in the South (one and a half million barrels a day) which is a predominantly Shia area and so not yet involved in this current fighting
  • The strategy of the insurgents seems to be to take territory, which is a mistake in the early stages of warfare. Unless you can hold it with plenty of manpower it is better to concentrate on defeating the enemy forces (see Clausewitz et al) otherwise counter-attacks will prove fatal. It seems likely that the insurgency’s territorial gains will be reversed or reduced as soon as the Iraqi government achieves a modest amount of resolve and a lower-level of violence will resume. This is not Armageddon, just “I’m a getting’ outa here”.

Elsewhere, the pounds recent strength has now produced an extension against the Euro, which has also been weak against other currencies:

 

Euro-£ extension

We would take this opportunity to ‘fade’ the move and would sell the £, buy the € - bearing in mind that this is only a daily-scale signal so has a shelf-life of about three weeks, as does the Crude oil signal.