Short exposure to crude oil has been trending higher among large speculators and managed funds since late March, although clearly they remain net-long overall. And whilst long exposure dipped a couple of weeks ago, both sets of traders increased long exposure last week and net-long exposure remains at a healthy level overall. And neither is it at a sentiment extreme, to warn of a major trend change.
My take on this is that both the downside and upside potential for oil may be capped over the near-term. As underwhelming as this may be from a speculative perspective, it is still useful information to have, as it can manage our expectations accordingly; perhaps we’re not looking for an imminent move to $100 in the same way that a plunge to $60 seems far fetched. And as oil prices have fallen over 12% since the April high, perhaps shorting crude oil is becoming ‘long’ in the tooth.
WTI crude oil technical analysis (daily chart): The daily chart shows a clear 3-wave retracement from the April high. And what makes me suspect it might mark the end of a correction is Wednesday’s bullish outside day, with a false break of $78 leaving a lower tail and recovery back above trend support. Given RSI (14) came very close to oversold last week and fell to its lowest level since December, a case for a bounce seems apparent.
That is not to say any such bounce will be a walk in the park, but I would err on the side of caution with being short around these lows.
What might make any rebound scrappy is that the 200-day average and EMA are near the $80. Already that seems to be having a dampening effect on prices rising for a second day, so bulls may want to see dips on lower timeframes and seek to exit around the averages or the $80 handle.
We’d likely need to see a break or daily close above the $80 handle or 200-day MA at $80.20 before being too confident that a decent bounce is underway. But with oil having fallen 12% in a few weeks, traders remaining net short and the potential for the US dollar to extend losses, my bet is that it will manage to break above $80.20 in due course.