For traders who’ve been waiting oh so patiently, it genuinely appears an oil sell-off has begun. Discretionary trading requires sound, subjective judgement which comes through diligent research and a practiced hand. Do I have any of that? It’s certainly questionable, but you’re here reading so let’s get to the squiggly lines.
There’s a massive confluence of moving averages, Bollinger Bands, and indicators on a weekly chart signaling a sell-off could have some legs, at least temporarily. Have a look at the monthly chart of West Texas Intermediate (LC). That horizontal yellow line represents a very good stopping point should momentum build to the downside as H1 P&L’s get protected.
A 20% correction in oil would not surprise me. This coincides with action and positioning in the US dollar. For event-traders, OPEC+ activity has definitely raised hackles so I suspect stops have been pulled up pretty tightly which can exacerbate a move to the downside.
On the monthly chart above, since the bottom of that negative-price move in April 2020, hi-to-lo oil is up 1000% in 15 months. It’s up 350% using closing prices, and hell, it’s up 135% since November.
We did get a 15% correction starting in March that began a little consolidation period from which oil has recently broken out.
I suspect that June breakout drew in a bit of newer capital that failed to position earlier and could be chasing in addition to pyramiding by existing position holders. Feels like a false breakout from that wedge. Commodities across the complex have all been taking breaks, but not the King of Commodities. Consolidation yes, but no true breaks.
I’m of the persuasion that a commodity super bull has legitimately begun. But that thesis ran so white hot with nary a breather, that now it’s time for the granddaddy of the commodity complex to kick up its legs for a minute. Any multitude of ways to go short.
One of the methods I like is Puts on the XLE. Vast liquidity with excess positioning will allow for a potent ROI on a well-timed swing.
That horizontal yellow line on the weekly XLE chart also represents another good confluence of moving averages, bands, volume@price, etc. Use any spread methodology desired within the options complex, but $45 looks like as good a point as any for a possible bottom and a consolidation to begin.
As usual, I’m handicapping here. This is a personal bet just for me and no others using my own proprietary methodologies that have consistently given me an edge. Risk management is always the key to a successful trade. I use a mix of technicals, fundamentals, and anecdotals that all get swirled around the noggin until the organic computer kicks out a trade suggestion just for me. Then I write about it on a site nobody reads anyways to help me flesh out and think about the theses a bit more.
If you’re somehow reading this content, it’s not a trade or investment recommendation. I’m just thinking out loud.
Commodities and stocks have just been on a tear in 2021. Performance as such for both the S&P 500 and BCOM has occurred a handful of other times in financial history. It tended not to bode too well for commodities over the next couple of months. Observe the following chart from SentimenTrader.
Sample size not withstanding, with oil and natty combined being the largest component of the BCOM, a short thesis just might profit.