The Oil Conundrum

       The question stands: where in the world is oil headed?

       Earlier this year the thesis was a potential long in oil, assuming major price levels in the $50’s price range were broken. That happened, and /CL futures rallied up to a high of $66.50 on January 25th, 2018. 

       Then, the retracement came. February 2nd to February 15th saw price go from $66.10 to $58.01. This shake in the uptrend took out a lot of the bears, and we see buyers flooding back in. 

       In fact, price refused to stay in the $50’s range for too long. There was such a lack of sellers and such a surplus of buyers that volume of 500k contracts managed to push price above $60 on Feb 14th, compared with the 720k contracts it took to push price below $60 on Feb 9th. So, the incentive is bullish below $60, or at least it was last week.

       What does this mean for the current price and trend? We can look at a chart to give us an idea.

 
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       Let’s tear this chart apart. Firstly, we must recognize this is a daily chart, so price levels/areas here are far more weighted than lower timeframes. First thing I noticed is that the 200 EMA (red) has been respected. The price range around the 200 EMA has acted as a huge support, and the retracement paying dues to it only further affirms that it IS a retracement and nothing more.

       Now let’s look at the 7 and 20 day EMA’s. Notice how it’s nearing a bullish crossover. If price and volume pick up, we can expect a full crossover, which would give affirmation to the long positions.

       The Chaikin Oscillator is showing that volume is going into a bullish zone; the 94.988K line on it is a resistance level that once broken, has proved to garner stellar uptrends. Notice how the pull below that line did not go down to the previous pulls below it. This only further affirms that this was no more than a pullback.

       So, what is the trading plan? If you manage to get a long position on oil in the 60-61 area, lay back and let the trend ride. You are in a good place. If not, watch for light retracements during the week for entry opportunities.

       The facts and technical analytics show oil is headed up. How much is it headed up? Who knows; to take a guess would be no more than a gambling speculation. Nonetheless, this is a profitable swing for the longs, and the alpha returns will thank you for it.


Definitions

EMA: the exponential moving average is used as a momentum indicator. It averages out the closing prices for a time range (chosen by the trader). The exponential moving average gives a heavier weighting to the most recent closing prices, and so is optimal for trade signals, as it less lagging that a simple moving average (which gives no weighting).

Retracement: when there is an uptrend or downtrend, price will sometimes move in the opposite direction for a short time span, which the most common retracements being 20-30% of the trend. This happens in new price territory, for example the 60’s price range in oil.

Alpha: the excess return of a portfolio compared to a benchmark index such as the S&P 500.

Long: buying a stock/commodity. This is a bullish position.

Short: shorting a stock/commodity. This is a bearish position.

Future: a financial contract that specifies an amount of an asset/commodity to be sold/bought at a specific price on a specific date. These contracts are written in primary markets as forwards, and then traded in secondary markets as futures. 


 
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Shayan is a finance enthusiast from Bayview Glen School. He actively manages his fund, Saturn Capital Management Corporation, and works in commodity futures markets.