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Oil Market update - COTs even more bullish

Clive Maund
June 1st, 2005

Although the oil sector is likely to succumb to short-term profit taking following the recent runup, the correction in the sector is viewed as being complete, and all that remains now is for it to complete a small base area above its long-term 200-day moving average after which it should embark on a substantial new uptrend. The last Marketwatch called the bottom in the sector, based on the extent of the reaction and also on an analysis of the COT figures. Since that report the COT figures have strengthened the bullish case for the sector even more, as we shall later see.

The 6-month chart for West Texas Light Crude shows the rally in crude over the past week or so from an area of very strong support, but, so far, this remains a rally within a continuing downtrend, however, downside momentum is waning, as shown by the RSI and MACD indicators, which are turning up. Following a 2-month reaction this market is in a classic buying area, as it is above strong support and its rising 200-day moving average. A short-term reaction from here should throw up a near perfect entry point.

Turning now to the chart for the OIX oil stock index, we see that the oil stocks attempted to break higher last Friday, following a significant short-term rally, but this advance ran into the still falling 50-day moving average, indicating that it is probably still too early for the expected new uptrend to begin, and that some more basing action above the 200-day moving average is to be expected. Therefore the index is expected to back off short-term before staging a decisive breakout. Nevertheless, the recent advance culminating in Friday's attempted breakout shows that the market is starting to perk up again.

It was planned to write an article examining the action in a range of major oil stocks, but on looking at their charts they mostly looked like clones of each other, slavishly following the oil stock indices, so it would have been a waste of time. Therefore, it is only necessary to make a correct assessment of the index charts, and, having done that you can pretty much decide what major oil stocks to buy by throwing darts. That said, in accordance with tradition, we will look again at the chart for Exxon Mobil, with the emphasis on look, because there is little point in writing anything about it. The chart is so similar to the oil index chart that what is written for the oil index applies equally to Exxon Mobil. The only difference is that Exxon did not try to break out last Friday.

We will finish by taking another look at the COTs chart, which, with last Friday's update is even more bullish than it was last time we looked at it. On this chart we see that the Commercials have ramped up their long positions even more, so that they are at a level comparable to that which they held last December, before the big Spring rally. The small and large specs, in accordance with their time-honoured tradition of being wrong in style, have even had the nerve to go short in recent weeks. Despite the probability of a short-term setback it is hard to envisage a more bullish set of circumstances.

Clive Maund

Clive.Maund@t-online.de

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany.

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No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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