How to take advantage of this skyrocketing commodity
Thursday, 8 November 2018
By Bernd Struben
- Let it flow, let it flow, let it flow…
- Oil down…uranium rocketing
By now I’m sure you’ve heard the results of the US midterm elections.
There was a little something there for the left and right alike. Not unlike the sports our kids engage in these days. Everyone gets a prize.
The Democrats took control of the House of Representatives. At time of writing, some seats are still up in the air. But the Dems have a solid majority regardless.
That means Trump can look forward to subpoenas from the House on matters like his taxes and potential conflicts of interest with his business holdings. There’s already been some grumbling over the 18 trademarks the Chinese government granted to companies linked to Trump and daughter Ivanka.
If nothing else, this should provide for some interesting soundbites as Trump returns fire.
The Republicans not only held onto the Senate, they increased their majority there. With that, the threat of impeachment fades away.
And while the word ‘gridlock’ is being thrown around like it’s going out of vogue, we’ve already seen how Trump, like Obama, is happy to issue executive orders in an effort to do an end run around Congress.
And don’t forget, conservatives now hold a majority on the Supreme Court.
In just two years in office Trump has appointed two new Supreme Court justices.
You likely recall the last one. It’s hard to forget the sensationalised mudslinging following Brett Kavanaugh’s nomination.
Kavanaugh and his family may disagree. But we’re going with circus legend PT Barnum on this one, who famously claimed, ‘There’s no such thing as bad publicity.’
Lacking that bad publicity, though, do you remember Trump’s first Supreme Court appointment?
Don’t feel bad if he’s slipped your mind. I took an informal poll at Port Phillip Publishing’s Albert Park office this morning. Only six people knew who Neil Gorsuch is. 23 had no clue he replaced Antonin Scalia on the court in April 2017.
If only Gorsuch had been accused of lurid acts at a 1980s high school party!
But Trump won’t need to rely on executive orders, the Supreme Court, or ‘matters of national security’ to avoid gridlock.
Trump tends to dance to his own, decidedly unconventional beat. He’s mostly a Republican in name only. And the self-professed ‘master of the deal’ claims to be ready to play ball.
From The Australian Financial Review:
‘“Now we have a much easier path because the Democrats will come to us with a plan for infrastructure, a plan for health care, a plan for whatever they’re looking at, and we’ll negotiate,” Mr Trump said.’
Healthcare in exchange for a big, beautiful wall, maybe?
Regardless of how those negotiations eventuate, investors were cheered by an end to the pre-election uncertainty.
Indeed, almost every major market in Europe and the Americas closed well into the black. At time of writing, nearly every Asian exchange, and our own ASX, are following suit.
Let’s have a look at those markets now.
Overnight the Dow Jones Industrial Average closed up 549.29 points, or 2.13%.
The S&P 500 gained 58.44 points, or 2.12%.
In Europe, the Euro Stoxx 50 index finished up 38.74 points, or 1.21%. Meanwhile, the FTSE 100 gained 1.09%, and Germany’s DAX closed up 94.76 points, or 0.83%.
In Asian markets, Japan’s Nikkei 225 is up 433.69 points, or 1.96%. China’s CSI 300 is up 0.68%.
In Australia, the S&P/ASX 200 is up 25.13 points, or 0.43%.
On the commodities markets, West Texas Intermediate crude oil is US$61.73 per barrel. Brent crude is US$72.07 per barrel.
(More on oil below…)
Turning to gold, the yellow metal is trading for US$1,225.04 (AU$1,685.53) per troy ounce. Silver is US$14.55 (AU$20.02) per troy ounce.
One bitcoin is worth US$6,524.77.
The Aussie dollar is worth 72.68 US cents.
Let it flow, let it flow, let it flow…
Getting back to oil…
While WTI crude slipped 11 cents overnight, get ready to hear that the bottom is in…and prices are going back up.
OPEC meets again on Sunday. And Iran will be pressing the organisation, and Russia, for output cuts in 2019.
This may have the oil bulls excited. But I wouldn’t put much stock in it.
Don’t forget that Iran is on the US blacklist. And the Saudis have long aligned against the Iranian government. The Saudi royal family also remains eager to please the US, following the horrendous assassination of journalist Jamal Khashoggi in the Saudi embassy in Istanbul.
With its weak ruble and relatively low extraction costs, Russia is unlikely to be in a hurry to cut its own production levels either. Not at today’s prices, in either case.
And the story out of the US just keeps getting better. That is, if you like a good supply glut story.
First, news from the oil rich Permian Basin indicates that the delivery gridlock is nearing an end. At least three new major pipeline projects are scheduled to come online in 2019.
Let it flow, let it flow, let it flow…
Then there are the ever-growing US stockpiles. From Bloomberg:
‘Oil fell to the lowest level since March after a U.S. government report showed the seventh straight weekly increase in domestic crude stockpiles and a jump in production.
‘Futures in New York dropped 0.9 percent Wednesday, extending the longest streak of losses since 2014. U.S. crude inventories gained 5.78 million barrels last week, according to the Energy Information Administration. Prices climbed earlier in the session on a report that OPEC and its allies are considering fresh production cuts.’
You can see the surge in US stockpiles (blue line) and the plummeting price of crude (white line) below:
Click to enlarge
Now I’m not much for technical analysis. But if you have a look at the chart above, you’ll note oil spent the last year setting a series of higher highs. It also continued to set higher lows following each retracement.
From a charting perspective, that’s very bullish. Right up until late October (circled) when the price broke below the July lows. And it’s kept tumbling since.
How low will it go?
WTI is unlikely to fall back below US$30 per barrel, as last happened in February 2012. But I believe US$50 is certainly possible before crude finds a floor.
If I’m right, that should prove good news for the airlines and other energy intensive transportation stocks.
Something to keep in mind.
Oil down…uranium rocketing
Oil may be in bear market territory, but that’s certainly not been the case for uranium.
In fact, uranium hit a two and a half year high this week. And it’s up over 40% since April.
From the Financial Times:
‘Uranium has hit its highest level in more than two-and-half years as big producers of the nuclear fuel buy material in the market and China prepares to reaffirm its commitment to build new plants.
‘Uranium, which is used in nuclear reactors to produce electricity, has been one of the best performing commodities of 2018, rising almost 40 per cent from its April lows.’
Port Phillip Publishing’s head of research, Greg Canavan, sure nailed this one.
Greg’s been tracking the uranium story all year.
Back in June he recommended three speculative uranium plays in his advisory service, Crisis & Opportunity. As he wrote at the time, the idea was ‘to take advantage of a potential turn in global uranium prices’.
Greg doesn’t make higher risk recommendations often. But when he sees the right opportunities, he pounces.
Here’s an excerpt from yesterday’s Crisis & Opportunity update:
‘Perhaps our most speculative bunch of stocks are our three uranium plays…
‘It’s early days, but so far, so good…
‘Nuclear is a part of a lower carbon emissions future. If the world is serious about climate change, and not just “virtue signalling” about it, then nuclear energy will make a comeback.
‘That will be good for uranium producers, like the three in our portfolio,
. They all rallied strongly on Tuesday, up 14.6%, 10.42%, and 11.36% respectively.
‘As long as the uranium price continues moving higher, it should be enough to see these stocks advance even though the broader market might be under pressure.’
I can’t share the names of the three uranium stocks Greg tipped. That wouldn’t be fair to his subscribers.
I can steer you in the right direction, though. You can get the full story in Greg’s ‘Element U’ report here.
Before signing off, don’t forget to check out the latest in the climate wars from The Australian Tribune:
‘Rent Seekers Rejoice! Australia to Remain in Paris Agreement’
‘Outside of religion, few topics generate the kind of impassioned debate as climate change.
‘In Australia that debate has become focused on the nation’s financial and other commitments as a signatory of the Paris Agreement.
‘Many are urging a rethink of that commitment, arguing it’s little more than a money grab by developing nations. And that those nations, urged on by globalist elites, will only demand more and…’
If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.
And it’s absolutely free.
Sign up here to get The Australian Tribune delivered free to your inbox five days per week.
You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.
Let’s Trade! Here’s Where the Rubber Meets the Road
By The Billionaire’s Trader
It’s time to answer the last question of the three I first posed to you a few weeks ago.
We’ve wound our way towards a model of price action that has a clear definition. It doesn’t rely on lagging indicators such as moving averages, MACDs, or RSIs.
Helpful note: a moving average is the running average share price over a set number of preceding days. For instance, a 21-day moving average is the average price for the previous 21 days. Obviously, that average price changes each day. MACD stands for Moving Average Convergence Divergence, and RSI stands for Relative Strength Index — which measures whether a stock is potentially ‘overbought’ or ‘oversold’.
Instead we only need to understand how waves develop in a trend, where the major support and resistance zones are within trends or ranges, and what prices look like when they are changing direction.
Creating definitions of all of the above is easier said than done, I assure you.
When faced with actual price action, the complexity of it is truly mind boggling. But when it comes down to it, a few rules applied over and over in an infinite variety of ways create all of the price patterns we see.
I’ll discuss all of these issues in more detail soon, in a series of videos that I hope you’ll take the time to watch. I’ll also reveal my identity for you soon, because from the feedback I’ve received so far, there are many people interested in understanding more about the way I analyse price action.
By the way, I like using video, because it’s far easier to describe these things to you by actually showing you what I mean on the charts. It becomes far easier to comprehend complex ideas. In fact, the first quick video presentation should be ready tomorrow, so keep your eyes peeled for that.
In the meantime, let’s get down to business, and spend today analysing an actual trade recommendation. This is a trade I sent out to a select group of clients last year. It’s the best way to answer the third of the questions I’ve put to you.
If you missed the first four articles you can find them here:
These are the questions I asked:
- What does a market look like when it changes direction?
- Is it possible to work out where markets usually change direction based on past price action?
- If so can we use this knowledge to enter trades that give us a good probability of being able to take profit fairly quickly to create a ‘free option’ so we can see what happens from there without risking our initial capital?
Reading the past articles is the way to go if you want to become familiar with what I’ll discuss today. But in short, the answer to the first two questions is that a market cannot change direction in whatever timeframe you are looking at, unless it creates a buy or sell pivot. And the key retracement zone in a trend or a range is 12.5–25% and 75–87.5%.
The next step of actually applying this information is when the rubber meets the road. That’s the answer to question three. Where do you place your stop loss? What is the initial target? When should you take all of your profit? Let’s use a live example to explore these questions.
Actual trade alert from March 3, 2017
Click to enlarge
On 3 March 2017, I sent out an email to sell short four stocks: Fortescue Metals Group Ltd [ASX:FMG], BHP Billiton Ltd [ASX:BHP], National Australia Bank Ltd [ASX:NAB], and Westpac Banking Corporation [ASX:WBC].
We’ll just focus on the FMG trade for now, but if you want to look at what happened to the other trades since then do so. WBC and NAB have sold off aggressively from the area where I told traders to sell short. BHP is the only one that has rallied.
You’ll see that BHP sold off for three months after my sell signal generated, giving us plenty of time to take some initial profit and turn the trade into a free option.
But to understand the answer to question three in detail let’s look at the Fortescue Metals trade up close.
Actual trade in Fortescue Metals Group Ltd [ASX:FMG]
Source: CQG Integrated Client
Click to enlarge
Now, there’s a lot going on in this chart, but I’ve tried to make it as intuitive as possible.
Remember we’re just looking at two things to help us gain a solid entry into the stock from either the long or short side. We are searching for buy or sell pivots on the monthly charts in the buy or sell zone of a wave. This can either be in a trend or within a range.
(By the way, people have told me that these buy and sell pivots look like a kind of ‘slingshot’ action. Due to the way the markets ‘pull back’ in one direction, and then accelerates in the other. I don’t know whether it really does look like that, but if it helps you understand how these pivots work, that’s fine with me.)
Of course, we can add a fundamental filter to the choices we make. So, when looking at FMG in March 2017, I thought at the time that the huge rally over the previous year was getting overdone. Prices had advanced from $1.50 to a high of $7.27 in a little over a year.
Many traders had been caught short FMG, and the strength of the rally had taken prices right up into the sell zone of the wave created after the crash in 2008. Prices had already been rejected from that zone three times since 2011, so I expected to see some selling pressure from that zone in the short-term.
But before taking action, we needed to wait for some sort of confirmation that there was selling pressure in the area I wanted to get short. That’s where the pivots come into play. By waiting for a close below the low of the highest candle, I didn’t need to fight the trend. I knew exactly where I would be wrong.
If we saw a buy pivot after we entered the position from the short side, I would know to exit the position. My initial stop loss was above the high that the price had reached over the past month, though. So I entered the stock from the short side at $6.30 on 3 March 2017, with a stop loss of $7.30.
FMG is an incredibly volatile stock, so having a $1.00 stop loss isn’t huge by any stretch. It can move $1.00 in the blink of an eye.
We set the initial profit target $1.00 below our entry price, and we took half profit there only six weeks after entering the stock. (It reached the initial target on 18 April 2017). Remember that when prices are in a range, the Point of Control, which is the midpoint of the range, is like a gravitational point around which prices oscillate.
Having an initial target near the Point of Control therefore makes a lot of sense. You can see the blue ‘target zone’ in the picture. It’s from the Point of Control to a level 12.5% closer to the entry point. It’s the zone where you should take some profit because, who knows, the price could hit the Point of Control and then bounce off it at a million miles an hour!
As I’ve been saying, no one knows the future.
We can have clever ideas about the fundamental value of a stock, but we are flying blind unless we create some sort of model of market behaviour to guide our decision-making. This example has shown you how I could use the answer to the first two questions to enter a stock and take part profit fairly quickly to create a free option.
Once we had taken half profit at $5.30, only six weeks after entering the stock, our breakeven price on the trade became $7.30 which is $1.00 above our initial entry price. That means we could give FMG a lot of room to move without ever really breaking into a sweat.
Hopefully, you’ve been able to keep up with how I analyse the market. If you’re not sure, read this and my other essays again. And, in a format that I think will make things clearer, make sure you watch my video analysis tomorrow.
Plus, tomorrow I’ll have more good news for you. Due to the positive feedback we’ve received, I’m putting together a three-part trading Masterclass. Details on the content of the Masterclass will be with you tomorrow. I know that’s moving fast, but I wanted to make sure you were really committed to learning about trading.
Since I started writing to you a couple of weeks ago, I’ve been convinced that you’re ready. So look out for more details tomorrow.
The Billionaire’s Trader