Thursday, March 16, 2017

Cautiously Bullish Oil

It may be time to dip a toe into crude oil.  Bring along a cleansing rag however because it is not a certainty that we will have struck paydirt. Of course, oil had a hard time over the last week following a stronger than expected addition to inventory reported on March 8th.  The contract fell 11% from the March 7th settle to this Tuesday’s (March 14th) low. 

Consider some technical conditions; 14 day rsi fell to 25 on Tuesday, recovering to 36 earlier today, aggregate open interest in futures hit a record high on Tuesday to 2.24M, bleeding modestly since.  Finally, ‘non-commercial’ (lrg spec) net long positions hit record high of 586K in mid-Feb and fell slightly since to 555K.     

Standard charting measures point toward no clear bottoming pattern with only modest gains over the last two sessions.  A more encouraging bullish pattern has developed when I use my model to sort through more significant price data.


In anticipating a base formation here, we are in part relying on expectations for a more expansionary global economic environment over the coming months.  Additionally, while the number of new session lows is not particularly impressive and does not itself give rise to oversold conditions, the absolute dollar value change over the last week and the percentage change from the recent holding pattern of $50-55 since early-December are sufficient to imagine the selling has run its course. 

In our last report on Oil (‘Oil Plunges After Candlestick Warning’ – March 8), we pointed out the uncertainty evidenced in the ‘double doji’ and suggested that the sell-off started on that day had power behind it to move further.  Since that ‘increased volatility warning’, a lot of information has become available.  And while this newly provided information itself may not inhibit additional volatility, we suspect that forthcoming volatility will be expressed more decidedly toward bullish price action.

We caution that reports of slower economic growth or additional news of extraordinary new supply discoveries will weigh on prices.  However, the bullish impulse created by the recovery from recent March ’16 multi-year low remains a dominant force and we expect the consolidation since December combined with the abrupt and meaningful sell-off in the last week to set the stage for another leg higher toward $60. 

Standard charting techniques do not currently show the potential bullish implications of our model.  Additionally, our more immediate bullish expectations rely on a settlement slightly higher than current levels.  As such, we would not support an all-in bullish positioning strategy at this point.  Instead, consider one third a normal positioning strategy at this stage, requiring a settlement at or above $49 in order to hold the position overnight and longer.  If successful, this position can be added to at settlement or again tomorrow or later. 

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