The Oil Chart and Airline Stocks
01:00, 17 april 2015
· Av CMC Markets
By Ric Spooner, Chief Market Analyst, CMC Markets Australia
Editor’s note – I’ve included Ric’s comments on Qantas because oil price crash has impacted trading in airline stocks around the world.
Qantas shares and the oil chart are not only linked but have well defined trends that could throw up some interesting opportunities in coming weeks. Here are some thoughts
While the market is currently rallying on the possibility of reduced US shale production, it looks like it remains at risk of continued oversupply in the medium term. The US now has very large inventories which could overhang markets for a while. Added to that, the new Saudi strategy of maintaining market share is likely to see them make the best of their relatively low cost base by supplying what the market will buy. Finally, a significant increase in sales from Iran looms as a real possibility given the atmospherics of the current negotiations over their nuclear program and the associated removal of sanctions. All this looks like a situation where rallies may be capped.
Looking firstly at the weekly Brent chart below, the drop out of the triangle in July last year produced a fantastic, impulsive down trend. The rally that began in January has produced the first meaningful counter trend move. With moves as big as this downtrend, its fairly unusual to get a V shaped recovery. Even if we don’t take out the January low, chances are we could work back towards it after an initial move higher. This fits with the oversupply scenario.
Source: CMC Markets
Taking a closer look at things on the daily chart below, Brent has nudged past recent resistance around the 38.2% Fibonacci retracement level.
One possibility is that Brent fails to push convincingly past this resistance. However, the slow stochastic on the higher time frame weekly chart is still trending up strongly suggesting scope for ongoing upward momentum for a while yet.
So looking at higher levels that could be of interest as medium term bearish opportunities, the $69.20 to $71.50 zone looks of interest. Brent is looking as though it may be forming a trend channel. If it price hits the resistance level around the $69.20 level it would also complete an AB=CD pattern. Another possibility would be a rally to the 61.8% retracement around $71.50 or even $74 where AB*1.27 = CD
Source: CMC Markets
Cheaper oil means lower costs and potentially higher profit margins for Qantas. Cheaper oil has been one of the drivers of the great rally Qantas shareholders have enjoyed over the past 6 months.
Like oil, the Qantas chart also features a trend channel. Wednesday night’s pop oil has seen Qantas fall away from the channel resistance.
It’s also possible to make an Elliot wave interpretation of the Qantas rally. If this holds true, a correction that ends around the channel support and above the previous peak at $3.12 could be a trading opportunity. This would fit with a relatively modest rally in the oil price However, if Qantas falls below the $3.12 support, we could see a deeper downward correction.