Oil Speculators Wrongly Are at It Again

The strategy of trend trading is one where traders aren't concerned with having a high win/loss ratio. Instead, they swing for the fence in hopes of hitting an occasional home run without regard to the frequency of strikeouts. In the game of trend trading, it is possible for one large market move to dwarf multiple moderate losses. However, in crude oil futures, the stakes are high and trend traders are experiencing an overwhelming test of their conviction. 

We can see it in the charts and the Commitments of Traders (COT) data offered by the Commodity Futures Trading Commission -- trend traders are jumping on the oil bandwagon at precisely the wrong time. Specifically, long speculators are piling into bullish trades near the peak of oil prices and liquidating the majority of their bullish holdings on the troughs. Obviously, the goal is to buy low and sell high, but this group  simply has been on the wrong foot all year. We suspect we are in the midst of a repeat of this phenomenon. Nobody wanted to be long oil when it was in the low $40s, but now that we are in the low $50s the masses are scrambling to buy. Unfortunately for them, they are probably late to the party (again). 

According to the latest COT Report, as of Tuesday of last week large speculators (those with deep pockets and trading large futures positions) had amassed a net long position of roughly 420,000. We've seen this figure as high as 525,000 just before prices peaked near $55 per barrel earlier this year. Given that oil has moved higher since the Tuesday measurement date, we suspect that large speculators are holding a net long position in the ballpark of 450,000 to 475,000. Accordingly, most of the oil rally likely has occurred already. It would take a considerably bullish shift in fundamentals to move prices above resistance areas in the mid to low $50s because speculative firepower is running low....237 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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