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

 | Jun 16, 2017 | 3:00 PM EDT
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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.

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