Oil's 'Long and Wrong' Speculators Are Selling Off; It's an Opportunity

 | Jun 16, 2017 | 3:00 PM EDT
  • Comment
  • Print Print
  • Print

Traders who are long and wrong in crude oil, as well as those looking to catch the falling knife, have been looking for answers in what has been one of the most severe WTI oil futures selloffs in recent years (that said, we've seen a lot of severe bouts of selling in this market).

We certainly don't have access to a crystal ball, but we are willing to make a guess at where the selling might dry up, based on our analysis of the Commitments of Traders Report issued by the Commodity Futures Trading Commission. If you would like more information on reading this report, we discussed it in last week's piece and it is extensively covered in my latest book, Higher Probability Commodity Trading.

We've been talking about the tendency of speculators to get aggressively long crude oil, despite widespread agreement by analysts that the oil market is oversupplied in spite of attempts by OPEC to control the glut.

Ironically, the large speculators, who are assumed to be the most experienced because of their deep pockets and large position size, have been repetitively caught on the wrong foot in the crude oil futures markets. Each time they have amassed a net long position of 400,000 contracts or more, the oil market has reversed, forcing this group of traders to liquidate.

On the flip side, the selling tends to dry up once their net long position shrinks to just over 200,000 net long contracts. In our estimation, if the crude oil futures market continues with this pattern, we should see oil fall into the low $40s. We are expecting prices to see $43.00, but recognize the potential for a quick plunge to $40.00.

Source: QST

The chart tells a similar story. Although oil has been volatile and seemingly messy, taking a step back to see the big picture reveals a relatively organized trading channel. The bottom of the channel should offer support near $43.00. Similarly, technical oscillators are falling into oversold territory.

We suspect the RSI (Relative Strength Index) will fall below $30 (currently about $33) on a move to $43.00 per barrel in oil, and this should put the William's %R near zero. Readings at the noted levels are generally inflection points capable of sparking a swift rally. If so, the price of oil should make its way back to $50.00 in short order.

In summary, it is easy to panic as oil prices are collapsing, but we the odds of a break and hold, below $40.00 are slim. Aggressive bulls might look to play the market from the upside anywhere from $43.00 to $40.00.

Source: QST

This commentary originally appeared on Real Money Pro at 11:30am on June 16. Click here to learn about this dynamic market information service for active traders.

Columnist Conversations

we have a nice winner here, we'll take it off the table. SOLD STZ AUG 185 CALL AT 12.75 (in at 6.10) ...
Good morning. Futures are flat this morning, and the banks are up after the Fed approved everyone's capital pl...
This week's AAII Bears are the lowest since late December/early January when they were 25.2% (current reading ...
GLW is up over 1.75% as we head into the final hour. The stock closed last week at new 2017 highs and is pushi...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.