Oil, Nope

To me, oil’s behavior today was pivotal.  A bellwether for up-coming months.

It trended down all day, falling through key levels: 50% of the entire up move on a futures contract adjusted chart, and through the bottom of the down channel.  Most importantly, it closed at lows of day, below these levels.

oil 7-28-16

There were two possible outcomes today.

  1. Today was a bear trap. Everyone getting short down here would get squeezed.  Price would move back to or through the open.  This would have created a very bullish picture.  A hammer candle rejecting these lower prices.

Like groundhog’s day, this would have said to me price will likely rocket back up, and take out the previous high, before going lower.

  1. What actually did happen. Price closed near the lows, making a bearish candle, showing prices down here are accepted as fair.

I thought the bear trap scenario was more likely.  My rationale was that by this point, everyone who wanted to get short already had.  So all longs had to do was push price back through the short stops, and price would squeeze up.

Interestingly, at 11:15 am PST, 15 minutes before close, someone with significant size showed up with exactly that idea, seemingly.  Price made its biggest rotation of the day, just over 30 cents, over 1 standard deviation.

But then someone with even bigger size, came in with conviction on the short side, and took the entire pop back.

Here is how all this looks in Bookmap

oil short failed squeeze 7-28-16

The first clue that the pop might fail, was when price fell back through the 30 cents level at $41.34, and liquidity back filled, as seen by the white line on the heat map.  The next clue was when price dipped below $41.24, which was 50% of the up move.

oil wick breaks 50% of short squeeze

On a bar chart, that lick below $41.24 shows as a wick.

Compare that to Bookmap

oil 7-28 push through 50%

In the histogram of the order book, we can see by the red dots that sellers pushed it through $41.24, selling through several hundred contracts of buy orders.  Price then drifted back up, but buyers were not even willing to try to buy through the sell orders stacked at $41.35.  When price fell through $41.24 a second time, it was game over for the bear trap.

This is of course hyper minutiae on intraday oil trading.  But it’s particularly interesting on this pivotal day.  This one slice of 15 minutes of time tells a big story about up-coming months, imo.

It is not necessarily a deeply bearish story.  There are certainly support levels below, both in the adjusted and un-adjusted charts.  But in my opinion, this level was important.  And even though oil surely will bounce off various levels below, I believe today’s action suggests it will spend a longer time at these lower levels, $39-47 ish.

In the chart at the top, we can see that the 61.8% level is at $39.18.  And this is certainly a relevant support on this time frame, and will likely support a bounce.  However, the probability of a continuation move back up through $53, immediately, is lessened, in my understanding.

On an absolute price chart, non-adjusted for contract changes, we can see that we still haven’t even reached 50% of the up move yet, which is at $38.89, let along the 61.8% level.  And we can see that these levels correspond to visible support/resistance areas.

oil 7-28 absolute price levels

These will certainly be playable areas.  And one can correlate them with levels on the contract adjusted chart, to give extra weight to trading ideas.

But for me the big contextual picture has shifted today.  I would be less willing to take very long time frame long positions in oil related vehicles, until further notice.

To me, this makes sense, in light of currency charts.  I will make a separate post just looking at the dollar.

But even allowing for a pullback in the dollar right now, it does have the appearance of a large time frame bull flag.  There is a reasonably good argument that the dollar will need to complete it’s up move, against other currencies, and change course, before oil can get the lift that would take it back towards $100.

This could take a while.

The behavior of oil can also give us clues about global socio-economic uncertainties.

Stock indices are making all-time highs.  But at the same time, so are bonds.  And commodity charts look bullish, while so does the dollar chart.  I’m a noob, but I understand this to be weird, unsustainable.  Something has to give.

The world is still not euphoric about markets.  So they will probably go higher.  This is not just my idea.  It’s well known.  We are climbing the “wall of worry.”

And normally, it’s thought that stock markets fall about 6 months ahead of recessions.  So this is all in the future.  We seem very likely to go higher for now, with the occasional liquidation break (currently overdue.)

But weakness in the oil bounce could be signaling sustained weakness in economies all over the world.

The idea that downward pressure on oil is due to increasing production, which increased due to rising prices, to me seems like the myopic view.  In the bigger picture, the most important drivers are:

  1. The strength of the dollar, and
  2. Global economic growth/demand

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