Tuesday, November 15, 2016

Crude, But Not Unlikable

We had been bearish on Oil for some time (See: October 19th – ‘Oil Primed for $25 Gain, But...' and October 26th – ‘Crude Oil; Impact Report - Bearish View’and finally; ‘Bear Oil Trend Still Strong’ and the latest – Nov 8th ‘Oil Not Right Yet - Still Leaning Bearish’ ) and feel that our case had been made.  Through trade yesterday, there has been 14 new session lows without meaningful interruption and we feel that the bearish trend is sufficiently stretched to warrant the recommendation for coverage of short positions.

Oil prices recovered earlier losses yesterday on news that an OPEC deal might be reached in the coming weeks.  That the market reacted to that news more so than the news itself is significant.  More important we believe is the news late yesterday in a delayed release that CFTC described ‘non-commercial’ accounts removed as much as 19% of their net long position, shedding 78,000 net long positions in the week ending last Tuesday.  We had pointed to the recent near-record level of net long positions by hedge funds as unsustainable and in part reason to expect lower oil prices. 


With the reduction in hedge fund net long positions and in part as result of the reaction to unsubstantiated news, it appears that market participants are in general better balanced and less inclined at this point to sell into any recovering price action.  

As such, we less bearish than we were when we first suggested bearish positioning at $51.70 on Oct 19th.  Today’s overnight price recovery suggests that the bullish implications of the indecisive session on Monday will be confirmed.  That the trend was stretched with 14 new session lows gives rise to an understanding that the market was indeed stretched and is at risk of a sizeable recovery.  In addition to stretched conditions and indecisive trade on Monday, we would note that should crude prices remain higher today into the close a bullish reversal pattern in candlestick analysis called a ‘three rivers’ would be formed.    

Holders of short positions might consider removing half of their position at this stage ($44.52 last) and the other half on confirmation of bullish reverse in a settlement today at or above $43.35 today.    

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