A Major Warning Sign for Oil

Steve cruised over to my desk. Holding his laptop, he pointed to the screen and said, “Would you sell?”

My heart rate jumped. I looked at the screen and hesitated…

Is this a trick question? I thought. He wanted me to give an answer… yes or no.

“I don’t know, Steve,” I replied.

“C’mon, man… would you?” he asked with a grin on his face.

I looked again… but I didn’t know. I didn’t have enough experience to make the call. And I clearly didn’t have conviction like Steve did.

“You should get to the point where no matter what, if you see this setup, it’s time to sell,” he said.

I’ll never forget that conversation. This was back in the summer of 2016. Steve sold his junior gold mining stocks that morning for triple-digit gains in less than a year.

Everyone thought gold was going higher. To sell then was a gutsy move to everyone but Steve. He was the only one I knew betting on lower gold prices.

But gold prices ended up falling for the next six months.

I’m telling you this today because the same setup we saw in gold in June 2016 recently appeared in another asset…

The same signs that preceded gold’s decline showed up again recently – but this time, in the oil market.

We first wrote about this back in May in our True Wealth newsletter. Oil prices were hitting new highs. And futures traders were all betting on higher oil prices.

You can see this through the Commitment of Traders (COT) report… the same tool that showed Steve what was happening with gold in 2016.

The COT report is a great contrarian investing tool. It shows us exactly what futures traders are doing with their money. When they are all betting in one direction, it usually means the trade is nearing exhaustion… and a move in the opposite direction is likely.

If all futures traders are betting on higher oil prices, it shows nobody is left to bid prices higher. That means the short-term upside is limited… and a fall in prices is likely.

Back in May, futures traders were at all-time bullish levels on oil. Take a look…

Oil prices bounced back and forth over the next few months. The commodity eventually peaked after rallying 7% from mid-May to October.

It was far from the double-digit rally most people were betting on. That’s why the COT report is so valuable. The extreme bullish sentiment in May meant another 10%-plus rally was unlikely.

In hindsight, it might seem obvious that the uptrend couldn’t last forever… But that wasn’t the mood back in May. Futures traders were all betting on higher oil prices. And everyone thought the uptrend would continue.

After peaking last month, oil has fallen hard. Eventually, there were no futures traders left to bid the price higher. And today, oil is entering bear market territory, down roughly 20%…

We can’t know how far prices will fall from here. But a 20% drop means oil is no longer in a strong uptrend. And that makes a bet on higher oil prices a bad idea.

First, sentiment gave us a major warning. Then, the trend turned down – fast.

This setup tells us to stay away from oil today. And if you are wondering what to do with your current oil investments, now is likely a good time to take some money off the table.

Good investing,

Chris Igou

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Source: Daily Wealth