Waiting for a kiss from oil

I have been waiting for oil to break down for some time and for sure I was a bit early for the call. But eventually it did follow the “prediction” from commercial traders who have long provided hint that oil would drop from its recent high around $55ish. Again and again for various assets, it has been demonstrated that commercial traders (CT) do have an edge over speculative traders (ST). They tend to give you early warning about an upcoming change of the trend of certain asset when they go extreme bet: when ST becomes extremely bullish on something, it is usually when CT goes extremely bearish. This is the time you should think about going short for the asset, i.e. go with CT. You will get this kind of hint from the weekly government COT report. Of course keep in mind this is just an early warning, not an exact time indicator.

 

Now back to oil. As I said, a 15-20% drop of crude oil could be expected from its recent high, which could bring it down towards $45. The recent decline was quite fast, pushing oil down to $47 just within days. I think it is a bit too soon too fast. Oil has hit its 200 DMA which is usually a strong support.  It is reasonable to expect that oil will mount a dead cat bounce to move up towards its 50 DMA around $52, a strong resistance. When it does that, we will see a kiss to the resistance from below, which will most likely trigger another more severe decline. It is not unthinkable that oil may have to go down to low $40s to complete this leg down. It is too early to say how oil will end up this correction but at least I do believe more downside is still ahead.

 

I have already taken my profits by betting with SCO for its downtrend. Actually I've added a long position to anticipate a short term bounce of oil. I’m waiting for oil to kiss its major resistance line around $52. If that happens, I will certainly go short again for a bigger drop of oil.