Last week you could have thrown a dart onto the floor of the CME and almost assuredly poked the eye out of a commodity bull. This week there's no telling who you'd maim. Blood and gore aside, the sideways pattern of the past three weeks is over as far as crude oil is concerned. The WTI contracts for January delivery dove from $80+ to touch the $70/barrel mark on Wednesday before popping back into $71 territory, concluding the six day sell-off was nothing to shrug at.
First, we're going to look at the WTI continuous spot chart and identify some selling momentum that we haven't seen since the bottom in crude in December.
The sideways action of crude is deceptive in the chart because the price staggers horizontally for nearly all of November, yet the value of the dollar continued to fall through the period. Therefore the actual value of the WTI contracts in foreign currencies began falling before the price destruction of the past six days, where the strengthening dollar allowed prices to fall nominally.
Turning to the technicals, the MACD technical signal has broken below zero after a long and progressive move lower, the Slow Stochastics are at the low end of their range, and the Relative Strength Index (RSI) is far below zero. These technicals suggest an oversold condition for the WTI crude spot, but also show a very bearish sentiment which was unleashed simultaneous to released pressure on the dollar observed below.
The dollar rose last week on rumors that the Federal Reserve would raise the benchmark Fed Funds rate from the current 0.01% level, despite remarks from Ben Bernanke which suggested that the economy has strong headwinds against it. It seems that the window between now and summer 2010, during which traders had expected record low rates, is growing too small for comfort and unwinding carry trades. It was only a matter of time before Bernanke had nothing good to say, and perhaps it was the speech to the Washington Economic club which ruined the party. He claimed that the economy had further "headwinds" to face, as if specifically guaranteeing a low Fed Funds. Unfortunately, those headwinds might just be enough to snap investors out of the risky assets (stocks, bonds, commodities) and back into cash.
If the large moves we've seen in crude over the past six days are any sort of warning to the future of the asset, how can you make a short oil play to capitalize from consumer weakness and decreased global demand? The sheer magnitude of selling involved in the move suggests that the Oil bulls may indeed be on the run and we suggest taking a look at the DTO Exchange Traded Note (ETN) as a possible vehicle, charted below.
Diamond Slice has a position in the Powershares DB Crude Oil Double Short ETN (DTO), which we are taking profits from at these levels due to the technical data mentioned above, anticipating a short term bounce in the price of crude. Investors should also understand that an ETN is different from an ETF and should be investigated carefully. Also always remember to keep an eye on the clock as the January contract nears expiration (December 24, 2009), when the price will gravitate towards the February delivery price as positions are closed and orders filled.
We will however be buying on bounces in WTI and forecast crude falling to sub $70 levels as supply remains high and demand continues to stumble amidst a short-term U.S. Dollar plateau. The dollar doesn't have to recover for production intensive commodities such as oil, copper, and steel to fall extensively, it only has to stabilize.
DS Disclosure: Long DTO