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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, April 21, 2020

1. Stocks poised to fall again, but will they?

2. When free market pricing works

3. Why uranium stocks are doing well

Market Moves

Bond prices rose while stocks fell significantly and closed on their low. Even so, there is a silver lining in the way the CBOE Volatility Index (VIX) closed. The VIX price level increased yesterday and today, and though it closed in positive territory, the price settled into close well in the lower half of the day's range. By comparison, the negatively correlated markets should have risen off their lows to make the VIX price finish up that way. This implies that option sellers expect the markets to continue reducing their volatility in the days ahead. If that were to happen, it would probably mean a bullish move in stocks before too long.

The chart below demonstrates another reason that this might be true. This chart features State Street's S&P 500 index ETF (SPY) from the beginning of March. The price action has formed what pattern-watching traders like to call a bearish wedge. It is so named because it features support and resistance lines that converge (thus the name wedge) and a forecast that price will break the support line and fall to the lows of the pattern. The historical probability that this pattern will break its support line is higher than average (about 60%), but the chances that it will fall to a new low are significantly less than average if the wedge is steeply pointed up (as in this example).

The most important detail on this chart is that today's action is contained in a much smaller range than the average of previous days. So unless we see market indexes begin to fall by 5 to 7 percent per day within the next week, it is unlikely that they will make new lows before turning back upward. That being said, chart watchers are probably better off being patient and letting this pattern play out, rather than jumping in aggressively.

When Free Market Pricing Works
The pricing of oil futures has shocked the trading world as people have begun to better appreciate how free market futures pricing can and does work. While the producers of oil certainly are loathe to think about it, the oversupply and lack of demand for crude oil has created a tremendous dent in their profits. But apart from this market reality, there is another logistical problem that plagues them: the transportation and storage of this erstwhile black gold.

With the glut caused by overproduction and the pinch in demand sparked by a worldwide pandemic, the places to put spare oil are becoming fewer and farther between. That means there are costs in addition to the price of oil itself that a producer and distributor must factor in. Now there may be clever logistics that can be brought into play to move, or use, oil in an efficient manner and thus free up space to allow more oil to be stored. But who would pay for someone to do that?

The free market futures buyers and sellers, that's who. The chart below shows how rapid and dramatic price movements provided such incentives yesterday. By being able to be paid to take delivery of a given number of barrels of oil, a company that actually has such creatively available storage space has the incentive to put imaginative plans into action.

It doesn't take much imagination to consider what would happen if some regulating body stepped in and put a floor on the price of oil, only to keep such solutions from being found quickly. Oil produced at cost would literally be dumped or left to leak out in some unfortunate location. The waste and environmental impact would be tragic to say the least.

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Why Uranium Stocks are Doing Well

When oil prices have plummeted in the past, it is typical for all other forms of energy commodities, such as coal or natural gas, to follow a generally similar pattern. Indeed Van Eck's Coal index ETF (KOL) and US Natural Gas Fund's index ETF (UNG) are both in a downward trend near their 52-week lows. That's because these other commodities act as a market substitute of sorts for oil.

However the chart below shows how the leading publicly traded Uranium company, Canada-based Cameco (CCJ) is experiencing a counter trend of sorts. The stock has doubled in the past month, mostly because it is a lot cheaper to turn off, and back on, a coal or natural gas plant than a nuclear reactor. While the demand for oil has certainly dropped, the demand for electricity has certainly not.

The Bottom Line

Oil prices rebounded by, mathematically, over 100000% from yesterday's lows, but the price still remains at a jaw-dropping 12 dollars a barrel. This uncertainty rippled over into stocks which sold off in the neighborhood of three percent. Bond and gold prices rose. Uranium producer Cameco is experiencing the unusual position of increased demand for its commodity right now.