Tuesday, August 23, 2016

Crude; Having Shed Weak Shorts, A Near-Term High May Already Be In



There were good reasons not get carried away by the bearish price action in WTI yesterday and I am glad to have waited to see if the bearish price action was confirmed.  Today we hear interesting news (Iran signals more willingness for OPEC action to boost oil price)  that though finding some detractors, has helped to buoy prices.    


 

To be sure, yesterday's sell off was particularly strong.  It was the largest single session decline since July 13.  It happened just after the contract had made a 12th new session high, so the contract could certainly be considered stretched (overbought). 



We should consider also the extent by which open interest has declined.  Since August 8th, when the aggregate open interest in Crude futures was 1.9m contracts, a three year high, open interest has declined by 162,000 contracts.  This is the largest ever decline in open interest over as short a period. 




My bullish recommendation for gaining long positions in Crude was, in part, because of a mismatch between where market players were positioned and what the technical conditions of the market indicated.  Clearly the bullish price action over the last weeks has caused some of the weaker shorts to exit positions.  The removal of these weaker shorts will eliminate a source for further bullish momentum.  This is not to say that there is no room for higher prices, but just that an important element of the initial bullish technical conditions has been removed.    




CLV6 (October Crude future) needs to settle above $48.215 today in order to discount the bearish implications of price action over the prior three sessions.  As I write, CLV is trading at $47.73. 


WTI has rallied by more than 23% since its early August low (‘Crude Oil Bear Market May Have Already Ended’).  Unless CLV6 settles at/above $48.22 today, longs should consider taking profits and re-engage with recovering price action.   We should respect the bearish reverse of Thur/Fri/Monday unless it is discounted by a strong settle today.          

       

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