It’s time to take the other side of the oil trade.
The price of the gooey black stuff closed at $55.69 per barrel last Wednesday. That’s the highest price in over a year. And, it’s more than 30% higher than where oil was trading when we made our “redemption trade” last October.
When it comes to commodities in general – and oil in particular – it pays to be a contrarian. Back in October, for example, most folks were looking for the price to fall. So, we took the other side of that trade and bet on a rally.
Today, after a monstrous rally, most folks are looking for even higher oil prices. Heck, one analyst on a financial news network spoke on Wednesday about a $100 per barrel price target.
Nobody was talking that way last October. And, it has me thinking that the next move for oil is most likely to be lower.
This chart seems to support that view as well. Take a look…
Oil is currently trading about 13% above its 50-day moving average (MA – the blue line). That’s an extended and overbought condition. Oil rarely gets more than 10% away from its 50-day MA before snapping back towards the line.
Also, the most recent move higher over the past month has created negative divergence on the MACD and RSI momentum indicators. As the price of oil has made a higher high, the indicators have made lower highs. This sort of negative divergence is often an early warning sign of a reversal in trend.
So, it seems to me that oil is more likely to be lower next month rather than higher.
Traders who bought oil last October should consider taking profits on that trade. Aggressive traders might consider betting on a lower oil price over the next several weeks.
Best regards and good trading,
Editor, Market Minute