In looking at Crude we can see that Price has fallen between the 62-76% Fib retrace levels of this nascient rally and is finding some support here. The reason we started positioning long in Oil was based on our macro view that Commodities would undergo a counter-trend rally at minimum. The Chinese liquidity injections, severely stretched trend following algo shorts, and positive seasonality all pointed to this conclusion. So Base metals rallied, then we saw the oil complex catching a bid, now Grains are on fire, and Softs are putting in a bottom. There is definitely a visible developing tail wind for the commodity complex.
Understandably Oil Bulls are skittish after the Q2 beatdown, and many shorts are excited about adding to their positions on any bounces. But we are seeing signs that favor another tactical Long bet.
1) The Producer Merchants are showing a very positive 99% 18m Relative Strength Score on their net position - So this is the most long they have been in the past 18 months. Interestingly, as at the July 3 CFTC report, even though Crude rallied to $47, a $2.83 cent rally in 1 week, we saw PMs only sell $2k contracts.. So what do you think they've been doing then in this week as Price has retraced that $3 rally? - We bet they have been buying more & we are interested in joining them on the buy.
2) Seasonality is very favorable now for WTI. Since 2000, the June - Aug Period has offered up a 60% winning % with average gains of $3.5 in the winning months.
3) Crude has printed losses in 5 of the past 6 months, and currently is down another $1.50+ in what is a seasonally bullish time. This type of statistical anomaly is what we love to find and bet on a reversion back to the mean.
4) In the face of bearish Gasoline inventory data, we find it very interesting that Gasoline has only retraced to the 38% Fib level and finding support here. This is giving us a tell that the oil complex is finding buyers here, even in the face of bearish fundamentals. This is what happens when trend following positions get too stretched to one side - Are we seeing this now?
5) We just printed a spinning top/ Long Legged Doji type candle on the daily chart showing indecision after this $4 drop. This is a Trend Reversal sign.
A trend is defined by higher highs and higher lows and this is what we have seen in crude since June 21. To maintain a bullish wave posture we don't really want to see price drop below the 76% fib retrace level, as this would mean that something else is happening and the uptrend is in danger. Therefore we are taking note that WTI has found support in the 62-76% Fib level and holding. Our exit will be an hourly close below the 76% level of $43.30. Meanwhile your upside is $47 to test prior highs , and potentially much more if we break that level. So your R/R profile is very favorable here.
Here is how to play it:
1) Buy 1 Sept WTI Contract @ 44.63
2) Buy 1 Sept $44.5 Put for $1.68
3) Sell 1 Sept $41 Put for .54 -
The Put spread will cost you approx $1.14. In the Event Aug Oil drops $1 & we exit the trade, we can expect to make about $300 on our put spread and lose about $1.10 on the future - So total Risk here is $800.
Our upside target is $47 or $2.40 from here, but we will add to this by selling a $49 Call on any 1 dollar rally for approx 50cents - target profit is therefore $2.90 minimum.
This setup gives us a 3.6-1 R/R with potential of 7-1 if we make it to $49.
Good trading to all