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Should Traders Trust The Drop Or The Bounce Back In Oil?

It has been an interesting couple of days in oil futures. The commodity had its worst day for a while yesterday as traders reacted to Donald Trump’s tweet threatening an escalation in the trade war with China. This morning (Friday), however, oil is bouncing back, and at the time of writing has recovered around half of yesterday’s losses. So, which move should traders and investors trust, the drop or the bounce?

The pattern shown in the above chart for the futures contract, CL, is one that is familiar to stock traders. Ever since the 2016 election, stocks have shown a tendency to overreact to Trump’s tweets, then recover losses quite quickly.

There are numerous single-stock examples of this, from Boeing falling on an early tweet from then-President-elect Trump about Air Force One to reactions to more recent attacks on Amazon (AMZN) and other more generalized attacks and threats aimed at big tech companies. The broader stock market has also reacted in the same way when Trump has tweeted about trade. In those cases, too, the initial negative response has proved to be an overreaction, as evidenced by the fact that the major indices keep hitting new highs.

There are, however, several differences when it comes to oil. The first is that oil traders tend to take a longer-term, more global view than the stock market.

We frequently hear from stock traders and analysts that the strength in the U.S. economy allows America to “win”…



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