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SEASONAL TRADING


Crude Oil Seasonal Bottoms

09/23/20 02:51:06 PM
by Mark Rivest

See why late 2020 could be an opportunity to go long Crude Oil.

Security:   CLV2020,CL2!
Position:   N/A

There are two bearish seasons for Crude Oil: May through June, and September to early December. The Coronavirus panic effected the early year cycle — a significant bottom before the bearish season began. The aftereffects of the virus panic could alter the late-year seasonality.

Seasons and Sentiment

Almost all markets have seasonal tendencies, sometimes with amazing accuracy. Occasionally a market could behave counter to its seasonal trend. When this happens, it could be a clue of a large price move developing. Crude Oil is seasonally bullish early December to late April.

Please see the daily Crude Oil WTI October 2020 contract chart illustrated in Figure 1.

Note that in January 2020 the entire rally from the beginning of the bullish period was erased. This counter seasonal move was strong evidence that a significantly bearish movement could be underway. The subsequent smash into the April bottom made new lows in a multi-year bear market and altered the Crude Oil course for the next seasonal cycle. Instead of declining in the May to June time frame there was a significant rally — perhaps the kickoff phase of a multi-year bull market. The late year bearish season started exactly when you would expect it decline — early September. However, there are factors that hint this could be a shortened bear season.

The lower part of the chart on Figure 1 shows the Commitment of Traders (COT) report. The COT report gives great insight into the sentiment of the three trading groups: Large Speculators, Small Speculators, and Commercials. The Commercials are the group to follow; they have the most money and knowledge about the commodity they're trading. Commercials are considered the "smart money" — they are not the infallible money.

The virus panic caught even the Commercials off guard. Note that at the April bottom Commercials had the highest net short interest of the entire year. Crude Oil Commercials are almost always net short because they need a hedge against falling Oil prices. As Crude Oil declines, they normally reduce their short positions, and at major bottoms the positions are usually just below the zero-line separating net long from net short.

The decline that began in early September shows the Commercials are gradually reducing the net short position as price falls. If Crude Oil continues to decline in the coming weeks keep an eye on the Commercials. If their net short positions approach the zero-line a significant bottom could be forming.

Figure 1. Almost all markets have seasonal tendencies, sometimes with amazing accuracy.
Graphic provided by: Barchart.com.
 
Long-term Momentum

Please see the weekly Crude Oil WTI Futures Continuous Next Contract chart illustrated in Figure 2.

Note that the weekly Stochastic has just recently had a bearish crossover and has just entered the neutral zone. The weekly RSI is in the middle of the neutral zone and would have to go below 30% to reach the oversold zone.

A .618 retrace of Crude Oil's April to August rally is a prime area where a bottom could be made. Note it's a different price level than what's illustrated in Figure 1. If Crude Oil breaks below the .618 retrace level illustrated for the October 2020 contract, the Continuous Next Contract chart could hold the answer of where a bottom could be forming.


Figure 2. The weekly RSI is in the middle of the neutral zone and would have to go below 30% to reach the oversold zone.
Graphic provided by: TradingView.
 
Fundamental Factors

The Coronavirus knocked the Crude Oil market off its normal trajectory and now the aftereffects of the virus crisis could shorten the length of the September to December seasonal time zone. Several American atates have been easing Coronavirus lockdown restrictions — improving the US economy and therefore increasing demand for Crude Oil.

There's also the possibility of a Coronavirus vaccine being developed. US President Trump has initiated "Operation Warp Speed" to develop a vaccine by the end of 2020. A vaccine could further accelerate the US economy.

A seasonal low for Crude Oil could come early, possibly by October. Watch these factors: Crude Oil Commercials nearing a net long positions, weekly RSI near or below 30%, weekly Stochastic near, or in the oversold zone, and a .618 retrace of the April to August rally. If there's a combination of these factors it could indicate a significant bottom within a multi-year bull market.

Further Reading:

Neill B. Humphrey (1985) "The Art of Contrary Thinking" The Caxton Printers



Mark Rivest

Independent investment advisor, trader and writer. He has written articles for Technical Analysis of Stocks & Commodities, Traders.com Advantage,Futuresmag.com and, Finance Magnates. Author of website Four Dimension Trading.

Website: www.fourdimensiontrading.com
E-mail address: markrivest@gmail.com

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