Technical analysis shows that the outlook for pipeline stocks is bullish.
We rarely write on technicals, since we’re relentlessly focused on the fundamentals. But there’s little choice. Investors are overwhelmingly frustrated with the failure of pipeline company stock prices to reflect growing throughput volumes. The U.S. just claimed the title of World’s Biggest Oil Producer (see America Seizes Oil Throne). Liquefied Natural Gas exports are set to more than double next year (see U.S. Oil and Gas Exports: A New Weapon). In willful defiance, pipeline stocks sagged. One sell-side analyst described recent investor meetings as, “at times blurred between market discussions and therapy sessions.”
For a chartist relying on technical analysis, we think the sector is setting up for a sustained rally. We don’t make investment decisions based on charts. As a visual price history they are helpful, but our portfolio adjustments are driven by shifts in long term fundamentals. However, many investors use technical analysis as a timing aid. Some pore over charts carefully before making decisions. Absent much market-moving news, such analysis is more relevant.
Energy infrastructure charts show three bullish patterns. The first is that the sequence of lower lows from late last year into Spring was not confirmed by the Relative Strength Index (RSI) readings. This type of divergence typically indicates weaker conviction among sellers on each successive dip, warning of a change in trend. Sure enough, the recent August high exceeded the prior one in February, revealing that a new uptrend has begun.
Supporting this, in June the 50 day moving average convincingly crossed the 200 day moving average, following which the sector moved smartly higher.
Further confirmation is provided by the clear upturn in the 200 day moving average.
This all points to a sector in which medium term (i.e. 3-12 months) momentum is turning up, with the recent softness not that material over a longer perspective. Crude oil technical analysis shows a bull market many months old, adding to the frustration of investors in pipeline stocks who feel the two are only correlated on the downside.
