In case you hadn’t noticed – the price of oil has been falling precipitously since September.
With the simple mechanics of supply and demand, larger U.S stock piles have been reported while U.S drivers (feeling the pinch of still “lofty prices at the pump”) are driving less. As of late we’ve also seen a strong U.S Dollar so that hasn’t helped much either.
I don’t feel we’ve got much further to go until oil reverses, and reverse hard.Perhaps another dollar or two max – with reversal coming in a matter of days.
Refiners may have already made moves on this – with symbols such as “WNR” already popping huge over the past week.
Forex_Kong_Oil_Refiners
I’d expect that “this time around” we’ll likely see the price of crude reverse here around 91.70 – 92.00 dollar area, with the usual correlating weaker USD.
I’m going to start running short term technicals on stocks here soon, as well hope to offer those of you who “don’t trade forex directly” additional options and trading opportunities.
Dig up “oil related stocks” over the weekend and plan to get long.
Oil Reversal Strategy: Currency Pairs and Sector Plays to Watch
USD/CAD: The Ultimate Oil Correlation Trade
When crude starts its inevitable bounce from these oversold levels, USD/CAD becomes your primary forex battlefield. This pair has been grinding higher alongside oil’s decline, but here’s the thing – Canadian Dollar strength typically follows oil recovery with brutal efficiency. We’re looking at USD/CAD potentially sitting around 1.3650-1.3700 when oil hits that 91.70 reversal zone I mentioned. Once crude finds its footing, expect this pair to collapse fast. The Bank of Canada’s monetary policy stance remains hawkish compared to other central banks, and higher oil prices only reinforce their position. I’m targeting a move back toward 1.3200 once oil momentum shifts. The correlation isn’t perfect day-to-day, but over weekly timeframes, it’s reliable as clockwork.
Key technical levels to watch: if USD/CAD breaks above 1.3750, we might see another leg down in oil first. But any rejection at that level with oil showing signs of life? That’s your short signal with size. Risk management is crucial here – use tight stops above 1.3780 and scale in on any pullbacks. The Canadian economy’s dependence on energy exports makes this correlation trade one of the highest probability setups when oil reverses.
Norwegian Krone: The Forgotten Oil Currency
While everyone’s focused on the Canadian Dollar, USD/NOK presents an even cleaner oil correlation play. Norway’s sovereign wealth fund and oil-dependent economy make the Krone extremely sensitive to crude price movements. We’ve seen USD/NOK rally from 10.20 to current levels around 10.85 as oil collapsed. This move is overdone, and Norwegian economic fundamentals remain solid despite global headwinds.
The Norges Bank has been more aggressive than most central banks, and higher oil prices would give them additional ammunition. EUR/NOK is also worth monitoring – it’s been range-bound between 10.60-11.20, but an oil reversal could push it toward the lower end of that range quickly. The Norwegian Krone tends to move faster and with more volatility than the Canadian Dollar when oil trends shift. Position sizing becomes critical, but the profit potential is substantial.
Sector Rotation: Beyond Basic Energy Plays
You mentioned WNR already popping – that’s just the beginning. Refiners benefit from cheap crude inputs, but the real money comes when the entire energy complex starts moving. Look beyond obvious plays like XOM and CVX. Pipeline companies like EPD and KMI offer leveraged exposure to increased oil activity. These names have been beaten down worse than crude itself, creating asymmetric risk-reward setups.
Don’t ignore the service companies either. HAL, SLB, and BKR – these stocks move like options when oil sentiment shifts. They’ve been priced for energy apocalypse, but a sustained oil recovery above $95 changes everything. The drilling activity that follows higher prices creates multiplier effects throughout the service sector. Canadian energy names like SU and CNQ provide additional geographic diversification while maintaining oil exposure.
Timing matters here. Don’t chase the refiners that already moved – wait for the next wave. Energy infrastructure and services typically lag crude by 2-3 weeks, giving you time to position once oil confirms its reversal.
Dollar Weakness: The Catalyst Everyone’s Ignoring
The strong USD has been the silent killer in this oil selloff. Commodities priced in dollars face automatic headwinds when the greenback rallies. But Dollar Index strength is showing signs of exhaustion around these 106-107 levels. Fed policy is approaching peak hawkishness, and global central banks are finally catching up with rate hikes.
Watch EUR/USD closely – any sustained move above 0.9950 signals Dollar weakness is beginning. That’s rocket fuel for commodity prices across the board, not just oil. The yen has been completely destroyed, but even USD/JPY is showing signs of topping out around 150. Japanese intervention threats are becoming more credible, and Bank of Japan policy shifts could trigger massive Dollar unwinding.
Gold’s been consolidating despite Dollar strength – another sign that Dollar momentum is fading. When both oil and gold start rallying simultaneously, you know Dollar weakness is driving the bus. Position accordingly across all your trades, not just oil-related plays. This macro shift could drive months of trending moves once it gains momentum.
Not the first chart posted to suggest this Kong. Does the delay in the Dollar rolling over mean that the drop will be more dramatic?
When you see oil at such a strong level of support down here – no kidding……I “hope” others are seeing it too!
I don’t think the “drop” will be an more dramatic no Andy as…..USD has really been hard to trade with its “constant” back n fourth / then consolidation / then head fake / then spike etc…
I’d need to zoom out to a weekly chart on $dxy for example ( or $usd ) and consider us rolling over here “around this level” – then making our way lower than the low 79….and lower and lower as the currency slides into “crisis area” through 2014.
As for yesterday / today – it looks pretty much like business as ususal around an important area / turn. “Sideways” is a market dynamic I detest, but unfortunately have grown to accept. It cannot be avoided.
Best bet at these points is to “ease into positions” or buy / sell around the horn, not getting to tied up in the “exact” level.
Morning Kong,
Did yesterday’s fed sponsored rally kill the kongdicator signal on the Nasdaq? Curious to hear your thoughts. Thanks!
No way!
The Kongdicator looks ahead , and plots entry price / time a considerable ways “ahead” of when the original signal is tripped. So in this example…I got my “signal” on Fri – looking for entry around close Monday.
Price went nowhere Mon OR Tues then “popped” Wed.
Enrty is still sitting “waiting” a few points “under” where the original signal was created. Not to say one couldn’t now “move that level higher” as price has moved higher ( which is a great thing if you are looking to enter short ).
Either way there is nothing ( absolutely nothing ) that would have me change direction / once Kongdicator and entry level is established. Price could go to the moon for all I care – I’m not in the trade.
Hi Kong,
So you are still looking at a weaker dollar? The thing is that in really looks bullish on a weekly chart. I’m curious to hear more about why you see it doing down.
Weekly doesn’t look bullish to me at all JM.
Flat out series of lower highs and lower lows – with this now being rejected at “yet another” lower high no?
those zigs n zags look to be aiming lower in my books.
That pop in WNR was fundamental, not macro driven due to a 500 mill merger deal:
http://www.thestreet.com/story/12108278/1/91video93-dicker-western-refinings-northern-tier-deal-in-focus.html?puc=yahoo&cm_ven=YAHOO
Hey right on I didn’t even look into it specifically!
Having traded WNR in years past…he.he.he….I just pulled up the chart while looking into oil!
Thanks man..
EM currencies rocking here today Kong with the USD/MXN back under 13 thanks to Yellen. Yen trades are frustrating as I’ve been hoping for a pullback in USD/JPY so I could get long, but instead it’s over 100. I’m shorting some GBP/JPY and EUR/JPY here. Are you going to add to your position Kong or has this trade idea fizzled for now?
Really looking forward to your stock analysis. For anyone looking for a long-term trade, GME (Gamestop) short all the way to single digits (it’s 57 right now; incredible!). It may take 10 years, but they’re going to be like Blockbuster eventually for those patient enough to hold on.
Hi David.
As I spend alot more time “laying in wait” than out there exposed to this market – plans are still very much intact, all be it – delayed “JPY wise”.
Commod currencies getting a nice bump here for sure, as is the Nikkei.
I’m afraid that perhaps many readers here are looking for a “free signal service” and aren’t really looking at things close enough “for themselves”.
A day like today would have surely been “painful” should one have gone off half cocked looking to time this to the second.
I re entered long GBP/AUD this morning and currently – that’s the only open position I have.
Ya yen longs were tough the last couple sessions. I’ve been weighting and unweighting yen longs for awhile. My original eurjpy short has almost retraced completely. I re upped several yen longs tonight. Patience is key…The move has yet to come. Added another short es contract tonight. That’s about it for exposure now. I’m full.
No signal service required here Kong. Over the last 18 months I’ve tried EVERY system, service, theory and strategy ever conceived (in demo). Until you taught me to “align the stars” fundamentally and technically the results were erratic. The insights given in your articles are more than enough to formulate trade ideas and more importantly dismiss them. Don’t change.
After my first month of real money, extremely conservative trading I’m 5% up after losses and happy as hell. Our sincerest thanks from Mr & Mrs Jacko – your gonna change our financials mate. Hats off from the UK.
Well thanks Andy that means alot.
I do plan to get this formalized and offer a members service, as I’ve been busy working away on it “behind the scenes”.
Eventually ( I need to purchase several more servers ) but….I plan to crunch the “kongdicator” into something that will work on a much larger scale / time frames / stocks / futures etc.
For now the blog is great, and it’s fantastic hearing that “maybe I’m doing some good”!
Thanks for the shot in the arm – lets keep at it.