What the smart money is telling us now

I have been bearish for the past 2 years for crude oil but we may have finally seen the true bottoming for oil this time. There are a few macro catalysts that serve good tailwind for oil moving forward:

• After a few years of brutal correction for oil, many oil companies could not survive or have to reduce oil production due to lower prices. That has helped cut down the overall supplies of crude oil.
• OPAC has finally given in to cut their share of oil production more seriously.
• More importantly, after years of aggressive QE all over the world to stimulate the economy, at least in the near future the worldwide economy appears to be recovering. The Trump’s tax cut law is very pro-business that could trigger a faster economic growth in the US. This is obviously very positive for the oil demand.

For me,  when the fact changes, I change my mind accordingly. I think oil is entering an uptrend that may last. For how long, I don’t know as it all depends on the underlying supply demand equation but I believe at least for a year or two.  The market is apparently thinking so as well as oil has been broken out the strong 3 year resistance level around $58 and maintained above it for a few weeks now. The question is whether it is safe to jump in now to ride the trend?  Well the smart money is telling us: not too fast!

 

As I have talked a few times before about the smart vs dump money via the COT report, those traders from the commercial end are the ones really knowing the fundamentals and they are the smart money that often provide a good signal when a trend may be changing in the near term. Conversely the dump money refers to those speculative traders who are typically chasing the prices and often a good contrarian indicator when their sentiment reaches the extremes. Right now, the smart money is extremely bearish with a record high of shot bets for oil while the dump money is extremely bullish for oil with historical high of long bets. When these two go to the extreme pole in the opposite direction, you better go with the smart money. I think there is a good chance the oil will come down first before its next leg up. Technically, the most likelihood first stop will be the support level around $58 and if the correction is more severe, it could go down as far as to its 200 DMA around $52. If you are thinking to jump into the energy sector now, think twice and better wait!