Let's take a look at how the oil short squeeze took place. In February, oil broke the January low of 2756, falling to 2605 on February 11th. Just as oil was testing and ready to break 26, the UAE Energy minister came out with remarks that they were willing to cooperate on production cuts. This instantly reversed the market off the lows to see it recover 30 in the coming days. Dubbing this the "OPEC put" as it clearly showed members of the organization were attempting to defend 26.
The move, setup a failed breakdown, leaving shorts below 30 trapped:
Crude oil chart sent to clients on Friday... pic.twitter.com/rDqZjno0VU— Chicagostock (@Chicagostock) February 17, 2016
Seven days after the bottom on February 11th, oil hit a high of 3421. Few days later, on the 24th, crude oil saw a pullback to retest 3100, in search of support and giving sellers another attempt to try and get back below 30. Lows of 3056 were made. With the bear trap now in place and oil seeing a $8 squeeze higher, OPEC came out stating they were no longer looking at a cut. Rather then seeing oil trade back down to 26, oil managed to hold 31, leaving shorts in trouble:
Saudi said no production cuts and CL holds 31. Bears are in trouble...— Chicagostock (@Chicagostock) February 24, 2016
With a short squeeze being fueled by OPEC, this setup a technical failed breakdown that gave traders looking for the squeeze the opportunity. With all this in mind and having a outlook to look for a short squeeze, just one thing was missing. A little voice on TV saying "If you are long oil get it through your head..." For someone looking for a short squeeze, this was the last piece of the puzzle. Why? Because it showed the cockiness of bears, and all the negativity out there. The perfect recipe to fuel a squeeze, and setup a bottom:
Oil bottom?— Chicagostock (@Chicagostock) February 24, 2016
"If you are long oil get it through your head"... https://t.co/EA2r23mPDz
Here is the audio/video clip. Fast forward to :50 to hear the genius remarks.
Sure enough, the market rallied from that 31 level back to 35. A week after holding 31, another inventory report came out. Once again the EIA reported a large build in supplies and it was a "bearish" report, however the market remained bid:
Another bearish CL inventory number and CL goes bid to take out late Jan high 3480. Bears still in trouble, $4 move since last week— Chicagostock (@Chicagostock) March 2, 2016
Fast forward to this past Friday, the market reached it's first level of major resistance at 4200 with a high of 4249. A 16.44 move off the low, or 63% gain! The moral of the story here is, fundamentals can remain bulish, or bearish in this case, however if the market does not react in kind to those fundamentals, technicals take control. Oil can still be over supplied and extremely bearish, but if you were recommending not to be long oil, and or to be short, you just missed a 63% rally off the lows, or a 40% move from Feb 24th. If you are still short, then you are taking some massive heat. At the end of the day, it all comes down to technicals. Traps are what fuel a market and if the boat gets to heavy on one side, regardless of how correct it is, it will tip over. As we saw, even with bearish inventory reports, the market stayed bid, leaving shorts trapped and giving way to fuel the squeeze higher. This would not have squeezed as high as it did, had the boat not been as full bears as it was. Now that the market is 63% off the lows and has made new highs for the year, do the shorts who were wrong now flip to being bullish? A little late for that, but that is what will take place. Same bears who thought market would continue lower should now be flipping to bullish. Did they at all see that squeeze coming? If they continue to remain bearish, how do they manage to remain solvent on the back of that face ripping short squeeze? As they say, bulls make money, bears make money, but pigs get slaughtered. Oil went from 107 down to 26 from 2014 to 2016. A 76% decline! When you have OPEC coming out defending 26, you have to really think about how short or bearish you want to be, and how much more juice the short side had left. If anything the squeeze gives sellers better levels to defend, then selling into the hole as it was in February. Going forward, crude oil has made new highs for the year, reversing the bearish momentum earlier in the year. First major resistance is being met at 4200, with next major resistance against 4600. If you are bearish, these are the levels you must defend. To squeeze out this resistance, the market needs to recover back through the October highs of 5092, to confirm a reversal. Pullbacks down to 3740 provide first level of support, followed by major support into 3140 to retest the breakout point. Pullbacks into these levels will now be areas for bulls to defend, with stops below the 2605 low. Failure to hold 2605 is needed to refresh any bearish trend.
RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT.