What Does This Say About the Future?

30 בספט׳ 2022

As many of you know, this week Warren Buffet increased his stake in the oil and natural gas company Occidental Petroleum Corp. (OXY).
Warren Buffett’s holding company Berkshire Hathaway now owns about 21% of the company.

In light of Warren Buffet's purchase, I analyzed the chart of OXY to see what he or his analysts might be seeing. As I'll explain below, what I found was concerning for multiple reasons.


This is the yearly chart of the entire price history of OXY. Each candle represents the price action for one year.



It is important to log-adjust your charts in general, but especially when analyzing higher timeframes. Below is a log-adjusted chart.



Since OXY is also a dividend-paying stock, analyzing its history over such a long time period over which it has paid dividends means we need to adjust for dividends as well. Below is a dividend-adjusted chart.



Now that the chart has been properly adjusted, we can do our chart analysis.

Looking at this chart, I immediately noticed that OXY is about to undergo a major Fibonacci extension. I will explain more below.

First, I applied Fibonacci levels from the lowest low to the highest high.





You can see my Fibonacci levels applied in the chart above (I hid the 0.5 level because that is actually not a Fibonacci level).

I noticed that, during the COVID-19 Pandemic, OXY's price bounced off of the golden ratio and then proceed to move much higher. See the below chart.



In my experience, this type of price action is rare and usually proceeds what is called an "S-curve jump". Without getting too deep into higher-level mathematics behind S curves, in short, an S-curve jump basically means a major breakout may occur on the time frame in which it appears. Following an S-curve jump, prices can move much higher. Since this particular jump is occurring on a high timeframe, be mindful that the move can seem slow, and there can even be periods of weeks or months of declines even though a breakout on the yearly timeframe is underway. Perhaps this is why Warren Buffet accumulated so many shares of this company. Warren Buffet is long-term investor and so investing based on the yearly chart is most consistent with a multi-decadal investment strategy like his.

To help you visualize what an S-curve jump looks like I've illustrated it below. This chart is purely illustrative and is not my actual price projection for OXY (it's impossible to accurately predict price so far into the future).



As shown above, price jumps from one S-curve to another, leading to significant increases in price.

Interestingly, the second S-curve often starts at the golden ratio retracement of the previous S-curve.



Once the price successfully jumps an S-curve, the price increases can be monumental. Actually, it is during the period after price jumps an S-curve that most people get wealthy from their investment. It's how 'millionaires are created'. However, price tends to falter at each successive Fibonacci extension. Below I've highlighted an example of this using Bitcoin which moves almost entirely based on Fibonacci extensions and retracements.



Notice how following a perfect golden ratio retracement, Bitcoin moved up to nearly the next Fibonacci extension level before collapsing back down a Fibonacci level. You can see clearly that price has been hovering right on a Fibonacci level in recent months.

Going back to OXY, we can use a regression channel to try to validate the hypothesis that price may move much higher in the coming year(s). See the chart below.



A regression channel merely measures how far above or below its mean an asset is currently priced. Each blue line represents a standard deviation from the mean. We can see that OXY's price recently reached its mean (the red line) before retracing back down. Similar to retracement after reaching Fibonacci extensions, it is common for price to retrace some of its move each time it hits a higher standard deviation.

What's noteworthy is that although OXY's price has come all the way back up near its all-time high, the regression channel shows that this level is now merely the price's mean. See the below chart.



This suggests that, from a mean regression perspective, OXY's price can rise much higher before becoming as overextended as it was the last time it was priced at this level.

If we conclude that OXY's price is poised to go much higher, what does this say about the future? What might spiraling energy prices say about the Federal Reserve's, and other central banks', ability to fight inflation? By buying OXY while the Fed is trying to fight inflation, is Warren Buffet fighting the Fed? What might higher energy prices say about supply issues in the long term? Might higher energy prices reflect a prolonged period of deglobalization, or perhaps, something worse like geopolitical conflict? What might the consequences of higher energy prices be for climate change? Will higher energy prices incentive more investment in alternative energy options like solar, wind, nuclear and hydrogen?

One thing is for certain: The scope of monetary easing that we saw over the past couple of decades is unprecedented in history, and it has created an asset bubble that is unfathomable. I will leave you with two additional charts. One shows how low U.S. GDP growth has been over the past couple of decades, and yet how high its stock market has climbed due to monetary easing.






How do you soft land a stock market that's risen into the stratosphere? By pushing it gently to the surface of the moon.