Since the oil crash first began last summer, I have constantly been
asked how low I think Crude Oil prices could go, and especially so the
past few months. My answer has been pretty consistent,
“I have no idea”.
To me there have been so many easier trades to be in out there that
messing around with this disaster hasn’t been worth the aggravation. As a
market participant that has to allocate assets and manage risk
responsibly, fooling around with crude oil has not fit our risk profile
with respect to any potential upside. It just hasn’t been there.
Well I actually think we might be getting that. Over the past couple
of weeks Crude Oil prices have rolled over and are hitting levels not
seen since early 2009, right around the time that the epic 200% rally
first got going. I use a 14-day RSI as my momentum indicator and on
these new lows in price, RSI is putting in a higher low. Here’s what it
looks like:
From a risk management perspective, there is zero reason to own Crude
Oil if prices are below the January lows. So at the very least, we have
a clean level to watch. It is marked by the gray shaded area. Above the
January lows, and I believe that a mean reversion could really get
going. Look how extended the price is from the mean (defined by a 200
day simple moving average).
So here’s how I see it. We know that sentiment right now is near
historic bearish extremes rarely seen in the past. So that’s one for the
bulls. Second, it looks to me like the US Dollar has put in at least a
temporary top (see
here and
here). If that is indeed the case, that’s gotta help Oil get a little boost. Seasonally, this is the
most bullish time
of the year for Crude Oil prices as we exit the worst period. And
finally, most importantly, this new low the past 2 weeks could be a
whipsaw. If we break back above the January lows, this confirms a bear
trap leaving all the new shorts caught under support and all the longs
that were stopped out of the trade now have to buy it back. This creates
momentum as all of the wrong shorts get squeezed and have to cover
while all of the longs stopped out have to re-buy. When momentum guys
like myself catch this, more buying comes in, not to mention the natural
buying already taking place anyway. This then leads to more short
covering and more longs “not in the trade” re-buying.
Granted, this is all the best possible scenario here that could
create an epic short-squeeze to take crude oil north of $70. From a
risk/reward standpoint, there a very few setups that are skewed this
much in one’s favor. If we never break out, then who cares. We’ve
remained patient this whole time, what’s another few weeks/months? And
if we buy the breakout and we rollover again and get stopped out? Oh
well. I’d take that risk/reward 100 times out of 100, which is the only
thing that really matters to me.
Gun to my head? I think we break out and I’m an aggressive buyer of that breakout.
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