Crimson and Clover, Over and Over

As I hypothesized in last week’s post, this week’s trade was everything I figured it was going to be, and more. Also less and faster. Then slower. Higher. Then lower. Ugh.

My focus markets – SP500 and WTI crude oil – this week were, at times, conflicted, conniving and contango-ed with occasional touches of queasy constipation. That’s what happens when all they are serving at the all-you-can-eat market buffet is boiled cognitive dissonance and turkey noodle casserole surprise.

Enough to make you gag, or even puke. Speaking of…

WTI Crude Oil

There’s been exactly 618 kinds of news this week on crude, not the least of which is showing that we’re about out of places to store what we’re pumping from the ground. Now (again, actually) we’re going to start storing it in flotillas of tankers. Which is a kind of windfall for shippers and tanker owners. It’s gotta go somewhere, and global producers say they aren’t going to stop pumping current levels just yet. Demand and price be damned. There’s also several interesting perspectives on the rude crude from last week in Futures magazine. Check ’em out.

I don’t spend a lot of time looking at CFTC Commitment of Traders (COT) data (for a bunch of reasons I won’t bore you with), but in strange times it can make sense to check under obscure rocks for fresh ‘n tasty data snacks.

Lo and behold, the January 6 COT report showed an interesting position skew, long vs short. Large speculators are as of last Tuesday long 270K versus 82K short contracts.  Small speculators are long 82K versus 71K short contracts and the most critical group, producers/commercials, are long 205K v 286K short contracts.

You probably already understand that the producer group is not really short in the sense speculators are. If not, then know that they are the ones actually delivering the commodity (or hedging their actual business interests) and they are providing considerable selling pressure to the market, to which we’ve borne witness. On the other hand, the speculator group, both large and small, are net long. This is telling us that they believe we are near a short term floor price. Or that they are trying to create one.

There were a couple of tests lower this week which were swiftly and mightily defended. It’s pretty easy to guess who might have been providing the defense given the COT report:

CL

But I wonder about two things. First, despite the sharp response brought to these downside tests, the charts are reflecting weakness, and (pretty, LOL) unequivocally so. Price struggled and lost to the bottom of the weekly VWAP on several occasions. We ended the week on the low end of the range and early days this week pushed the profiles’ VPOC (fairest price of the day) lower until creating a balance area Wednesday, Thursday and Friday:

CL2

Second, especially given where we closed, this COT net long position could be vulnerable to the producer’s relentless need to sell. This is kind of like longs trying to keep their heads above water, treading, while wearing no life vest and concrete galoshes. Producers have to keep selling, they’ve said over and over in the news propaganda they will, and the COT shows they definitely have been. IMO, all it would take is for the right speculative player with interests in even lower prices to dump a few thousand contracts at key times and it’s a fraking disaster (get it?). Speculative longs not stopped out right away could then be forced by risk managers to liquidate their positions.

At the same time, as I mentioned last week, we’re only a couple explosions away from some supply constraints, though this is the kind of thing that would likely affect the Brent and WTI contracts differently. The domestic US oil refining market dynamics and logistics are really messed up right now, and that’s what the renewed run at the Keystone XL pipeline is all about. Feedstock for US refiners who today have to blend light domestic crude with heavy imported crude in order to process it. But I digress….

It could be quite a show if this scenario plays out. The COT report says there are just not a fat pile of shorts to squeeze above. This, amigos, is how it should be. A market providing real price discovery. This also means an unclean, dirty or even filthy auction depending on your time frame. Basically, I’m expecting more sloppiness around key price levels until we get back into some kind of retracement mode.

All that said, the February WTI contract expiration is the middle of next week. Many will begin trading the March contract late this week, and this could be a time for shenanigans. Speculative longs who don’t want to take delivery of the February contract oil have to liquidate the position outright or roll their position to another contract.

So for continuation to the upside – save force majeure – bulls could just heave it above last week’s VWAP at 48.9x and late-week balance VPOC at 48.70 early and defend a couple of fierce downside tests. This would mean not only would they have to fight off selling aggressors hunting stops for a quick profit but also soak up the flow of contracts producers sell just trying to get their everyday business done. Success may encourage fresh longs to join the upside fight. What if the right (cough) motivated seller takes advantage of this position skew? Bulls could easily get a bear claw-festooned spear stuck right between their shoulder blades and go down with a bloody, grunting thud.

At this point I’m looking to a failed test of the $47 handle to open the gates of hell. 46.0x, 45.1x, 43.7x and 42.1x are targets lower. Should this late-week balance turn into near-term acceptance above last week’s POC of 48.75 and VWAP of 48.93, upside targets  are 50.2x, 50.7x, 52.0x and the week’s open around 52.70. I’m having a tough time imagining a universe, save exogenous events, where much higher prices would be seen given the fundamentals. At this stage, I’d expect the fundamentals to trump the technical aspects of the trade.

Remember the Alamo, SPOO Fighters

The ES is actually the simpler instrument to grok at this week. Friday’s trade called and sang the tune, which was Tommy James/Joan Jett’s Crimson and Clover (Over and Over). We rotated the full range (red and green boxes, crimson and clover, below) between the Alamo levels of 2060 to 2031. While these levels are providing great edge/reversion trades, annoyingly we’ve seen these levels and this range time and time again over the last few weeks. It’s created a thick range of small balance/HV areas which are getting harder (unless you just scalp for ticks I suppose) to trade because they are all so close together:

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ES2

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ES

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On Friday, the middle of the range was handily rejected just as many were expecting a late Friday upside face-melter. What the huge back-and-forth of the week is telling me is that we’re in substantial disagreement over the fair prices of the US large caps. Remember, the weekly POC’s still all the way down at 2015, Friday’s VPOC was 2041.

On the bullish side, we have rumors (expectations?) of even more central bank easy money in the EU on top of the flood of money spewing from the US, UK and Japan (among others). On the bearish side, many of the geopolitical shoes the market has been ignoring for many months seem to be more credibly threatening to drop. We also have real disagreement over the state of the US economy in the financial media. Depending on which market multiple you want to use, we’re either fairly valued, over valued or ready for multiple expansion soon. The heads are all feverishly talking their books now, and this is the time I generally just tune it out.

Anyway, the closing position of the week without a doubt has advantage going to the bears. The rejection of Friday’s mid range could be an interesting tell.  So much so that I created a new Alamo level at 2046.50. This is the price to watch early in the week and could provide a good short opportunity if bears come on showing teeth and claws. If you’re bullish, what you really don’t want to see is another test of the lower Alamo of 2031 area without a resounding rejection. This, by the way, is also the 50d EMA area. Lots and lots of traders are watching it.

So for early in the week I want to see this 2046 area hold for tests of 2056 and the high end of the range at 2060. Above this, and new ATHs are certainly within reach for the week. If resistance above holds and then the 2031-30 area breaks the 2023 area and the 2020-18 VPOC/gap area would be good spots for a long on a first test.  And then there’s the mid 1980s area where we bounced on January 6 to test again below that (on the weekly time frame, probably not Monday).

Not going out any farther than that at this point, and I have stopped considering any seasonality factors. Plus there is now so much confluence in the nearby range the levels are getting choppy and sloppy. We have Fibs, the 50 and 20d EMAs, etc., etc., etc. And because we’ve seen last week’s range so many times so lately, there probably are not a ton of stops on either side to fuel a really monster move outside it either way. Inside, Wednesday’s and Thursday’s longs are certainly vulnerable.

Oh, and uh, one more thing. I’ve noticed a change in the character of the coupling between the ES and CL. When oil plunges, the ES follows. Probably due to forced selling. But when it bounced hard this week the ES didn’t seem to care at all. Something to watch this week, methinks.

Trade ’em well…

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