The Path Forward Is Uncertain, But You Need To Be Prepared

Last week's price action was anything but encouraging. Following a technical breakout in WTI (above the down trendline), we are now right back at it.

For obvious reasons, the rejection close to ~$93 to ~$94 and the ensuing drop has many of the oil bulls worried. For starters, WTI needs to hold this breakout in the trendline. If not, this would be considered a false breakout with a drop back to $76 as the next support. There are micro-supports around $81 to $82, but the momentum may be too strong.

And if oil is weak going forward, then it will not bode well for energy stocks, despite the strong relative performance we saw since summer.

While our fundamental analysis of the oil market points us in the complete opposite direction (prices going up), the market needs to validate our analysis via the price action. Price action is the only truth in the market. There are thousands of analysts with thousands of predictions out there, but there's only one price. 

Now here's the reason why we are writing this WCTW. You need to be prepared emotionally and psychologically in case we are wrong in our analysis. Fundamentally, we can make the most convincing arguments. Because facts are facts, but the problem with markets is that you don't know what you don't know.

If I was forced to give you an answer as to why the oil market was especially weak last week, I would point to the beginning of Mexico's hedging program. In the past, this has always had a downward effect on prices. Once Mexico's hedging program ends in a week or so, the negative pressure on prices will dissipate, and price discovery will return. In the meantime, you may see sudden and violent downward pressures on crude out of nowhere.

But it's not just the oil price action that's making me want to write this piece. We are about to see where copper prices break out in the following weeks.