In the summer of 2014 when crude oil was trading near $106 per barrel, traders amassed the largest bullish trade in history. Once the crowd turned big-time bullish, crude started falling, embarking on a history decline, losing over two-thirds of its value in less than 2 years.
Currently, the Crude trade now reflects MORE bulls than back in 2014. Is sentiment alone enough to make a decision about what to do with this sector? I don’t think so. Below looks at crude oil and three other energy ETF’s and how they look from a Power of the Pattern perspective.
Crude's chart in the upper left shows that crude oil is attempting to climb back into its long-term rising channel at (1). If it does break back into its 30-year rising channel, it would send a positive risk-on message. Traders long crude oil want/need to see a breakout at (1).
With the most crowded bullish trade in history in play right now at (1), the last thing holders of long-crude positions want to see is weakness start taking place at (1).
At the same time, crude is testing important overhead resistance, XLE, XOP and OIH are testing short-term rising support levels at (2).
Crude oil and the broad market do NOT always correlate, even though they have for the past couple of years.
With so many traders owning long crude positions, what happens at (1) above could become the price point to determine if they are on the right side of this trade.