Oil Futures - The Case For A Short Squeeze In 3 Simple Charts

The energy market has been anemic of late but signs suggest that volatility is coming and that we may be nearing the tail end of the calm before the storm. Is there a case for a short squeeze in oil futures? Let's take a look and see what the charts are saying. Oil futures have been a victim of a plethora of bearish headlines ranging from OPEC jawboning to weakening economic data. After the wash out and subsequent bounce in early April, traders have since rejected crude futures (/cl) at the $64 handle as short sellers have used headline data to sell into rebound attempts and establish technical resistance at a lower level. That said, I believe that despite this the likely scenario here is that barring a left tail macro event, the $64 handle will soon give way and shorts will be forced to retreat, thus presenting an opportunity on the long side. Here's the bull case in 3 simple charts -

The Bollinger band width on /cl suggests an expansion in price is near

The chart above shows oil futures with the bollinger band width represented at the bottom. When the bands begin to tighten, the blue line drops to the lower bound and vice versa. Price cannot stay at either end of the graph forever - eventually it has to mean revert to the other side.

We now approaching the level where it historically bottoms and an expansive move follows. So, we know that price is soon likely to break range and expand for trend but of course this data itself does not confirm a bullish or bearish case, so we have to look at other factors -

Sellers have been defending $64 on /cl futures

Sometimes technical analysis can be extremely simple. To make the technical bull case let's look at the aforementioned seller level at $64. Without using any other indicators or strategies one can notice the simple fact that since the April low, we've hit the $64 handle 5 times on the daily chart. The first time was on 4/23 which resulted in a retreat to $55 that almost resulted in fresh new lows. The second time was on 5/21 - almost exactly a month after and that only resulted in a ~$4 dip to the $60 handle as opposed to the previous $9 pullback.

The 3rd, 4th, and 5th hits of $64 began on 6/2, which came just 2 weeks after the second hit on 5/21 which is half of the time it look to get back to that level before. We've now tagged it 3 days in a row with the lowest retreat going only to the $62 handle - $2 less than the $60 retrace in May. In so many words - sellers are seeing diminishing returns from fading the $64 level despite still having favorable headline data. Why is this? Let's look at how traders are currently positioned -

Speculators are all in on the short side of oil futures

The COT Index pictured in chart above shows that small speculators (often referred to as retail) (yellow) and large speculators (hedge funds/active managers) (blue) are essentially all in on the short side while commercials (banks, dealers) (red) are positioned long. This is usually the type of setup we see when too many market participants are on the same side of a trade which increases the risk of a reversal in the other direction. Commercials are often considered the "smart money" and when retail and hedge funds are positioned together on the complete opposite side as them it can often signal that positioning is too stretched and is prone to mean reversion. So in short I think there's a case to made for at least a near term breakout above $64, which could first take price to $65 - $67, then perhaps to $70 if buyers gain some additional momentum. A loss of $60 on a daily close would likely indicate weakness and could invalidate the trade. Note: The Non-farm payroll release is this Friday and could heavily influence price action in the oil market.

Support and resistance for /cl (N contract)

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