Ethanol futures have put forth an impressive rally effort since making all-time lows back on April 1. For this analysis, we will be looking at a daily close-only chart, which helps to smooth out some of the erratic price action found in ethanol due to its lower volume. In looking at the July contract, a rather clear five-wave Elliot sequence appears present, dating back to the April lows. In our view, the highs on June 22 may have completed that five-wave sequence, leading us to the current downtrend. If the current correction in price is the b-wave of a larger degree a-b-c corrective sequence, we would expect prices to rally further before stalling ahead of what should be fresh lows below the June 25 corrective low at $1.105. What could complicate this count is the preponderance of support at those June 25 corrective lows, including the 50- and 100-day moving averages. Interestingly enough, the 200-day moving average capped the rally on June 22 and would be expected to add resistance on any further rally attempt. These ideas considered, the overall uptrend remains intact, but we would be mindful of any shorter-term failure in momentum, which could be an early warning sign of a further correction below June 25 lows.
Even more impressive than the ethanol rally has been the rally in RBOB futures since the mid-March lows. Aside from a couple multiday corrections, this rally has been one-sided in its trend higher. In our view, the current rally is still in the third wave of a larger degree five-wave move higher, which could eventually see strength toward pre-COVID levels around $1.70 to $1.80. The one caveat to that count is the fact wave three ended at almost the exact 61.8% retracement of the $1.8033 to $0.4605 sell-off at $1.2904. That, combined with the bearish divergence in momentum according to the stochastic measure of momentum, would suggest the wave-four correction is underway. Worth noting, the gap on daily charts from $1.2324 to $1.3840 still has not been filled despite coming close on June 23. In our view, RBOB is likely entering a prolonged corrective wave, but that does not rule out a resumption of the uptrend with new highs above the $1.3253 highs from June 23. We will be watchful for any short-term divergences in momentum from price, which could signify wave four is nearing its completion. A recovery above the $1.2177 corrective high from June 26 would be a solid first step.
JULY HEATING OIL
In similar fashion to RBOB, heating oil has enjoyed a nice rebound from the April lows, although not to the same extent as RBOB. Heating oil has not seen quite the same correction lower as RBOB, however, with an overall uptrend still very much intact. To that end, heating oil futures have recovered just 38.2% of the $2.1195 to $0.6724 sell-off, which began on Jan. 8. Like RBOB, heating oil has not filled the gap on daily charts from $1.3023 to $1.3783 made in early March. This should act as a magnate for price action moving forward. Heating oil is above its 50- and 100-day moving averages, although has been riding the 100-day as support the past four sessions. The 200-day moving average is way above the market at $1.5245. RBOB is likely to be a leading candidate for heating oil, although the general demand for heating oil could remain a bit more inelastic given its ties to heavy-haul transportation as opposed to gasoline's more elastic demand from consumer driving. If lockdowns begin to occur once again, heating oil could outperform RBOB for that reason.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grains and grain futures involve substantial risk and are not suitable for everyone.
Tregg Cronin can be reached at email@example.com
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