Bullish oil traders have been wiped out.
West Texas Intermediate Crude (WTIC) has fallen in price for 12 straight days. One barrel of the gooey, black stuff cost over $76 back in early October. Today, one barrel of oil costs just $56. That’s a 25% haircut in six weeks. And, it’s one of the steepest declines oil traders have ever seen.
Take a look at the chart…
The recent action on this chart is the very definition of a “nosedive.” Traders won’t often see such a dramatic, one way move as we’ve witnessed in oil over the past six weeks.
The chart has systematically taken out one support line (the blue lines) after another – without any hesitation. And now, the price of oil is sitting at its lowest level of the year. Technical indicators, like the MACD and RSI, are more oversold than they’ve been all year. And many analysts are calling for oil to drop as low as $50 per barrel.
I’ll take the other side of that bet. It looks to me like oil is gearing up for one heck of an oversold bounce. And, I suspect that bounce will start today.
Let me explain…
The last time we looked at oil was back in late August. Back then, we noted how the price of oil had developed a sort of “holiday trading pattern” – where the price of oil would start to rally one or two weeks before a major holiday. Then it would decline briefly right after the holiday.
You can see the action in the red rectangles in the chart above. The price of oil spiked higher going into Memorial Day, Independence Day, and Labor Day.
That action made total sense. Folks tend to drive a lot more during three-day weekends in the summer. So, the price of oil would rise in anticipation of increased demand for gasoline.
Curiously, though, the biggest rally in oil this year happened following the post-Labor Day decline in the weeks ahead of Columbus Day (or Indigenous People’s Day, Native American Day, Cougar-Mellencamp-Tractor Pull Day, or whatever it’s called anymore). That holiday isn’t normally known for lots of traveling. But heck, the pattern played out well as oil rallied to its highest price of the year going into the holiday. Then the price of oil declined sharply afterwards.
Looking at the calendar today, it’s worth noting that Thanksgiving is rapidly headed our way.
If the holiday trading pattern continues to play out, then the price of oil should start moving higher in anticipation of increased driving going into the Thanksgiving holiday.
So, I like the idea of buying oil today. The price of oil is remarkably oversold after declining for 11 straight days. Investor sentiment – a contrary indicator – is bearish. And, we have a major travel holiday coming up next week.
This setup looks good for a solid bounce in the price of oil.
Best regards and good trading,
Jeff Clark
Reader Mailbag
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Hi Jeff. I’ve now read and learned a lot from your special report “How to Win 90.2% of Your Trades Every Earnings Season.” Thanks. It showed me how I must sometimes be the option seller, but other times, be the options buyer.
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What do you see happening to the price of oil as the holidays approach? And Delta Report subscribers, which one of Jeff’s services do you find most helpful or useful?
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