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Multiple Factors Suggest A Contrarian Trade In Oil

Trading Screen

Regular readers, god bless them, will be aware that I am a bit of a contrarian. Most dips are buying opportunities to me and commodity rallies result in my cursor hovering over the “Sell” button. It will come as no surprise to them, therefore, that with WTI rallying strongly in the last week and currently trading up around $50, I have been looking for a reason to sell. There are reasons for the run up such as the disruptions caused by Hurricane Harvey, but they are short-term in nature and the fundamental long-term reason for oil’s weakness remains…U.S. shale production is high, and growing.

Of course, the problem with any contrarian trade is knowing when to pull the trigger. Even if the commodity keeps going up way past the point of logic it will not happen in a straight line and the corrections can be profitable, but momentum is a powerful thing and losses quickly pile up if you jump in too early. If you are considering a contrarian trade, therefore, two things are needed, an indication of some sorts that a turnaround is imminent and a loss containment strategy that will limit your losses should you be wrong.

The trigger for a trade can be based on several things, but the most reliable indication comes when two or more of those things occur at the same time. That is the case with WTI right now, where two sell signals, one obvious and one not so much, have been hit in the last couple of days. The most obvious of the two is a technical…

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