Guest Post By: JB Marwood @MarwoodJB
As a trader, you will be aware of the significant move that’s been going on in the oil market over the past 7 months.
In fact, even those without any interest in markets will be aware of what’s going on, as the drop in price has been sharp and deep enough to make headline news on a regular basis.
And whenever the Joe-public become aware of something going on in the markets you can be sure that things are about to get even more interesting.
Here’s five things we can know for sure about the oil market:
1. No-one can pick the bottom
A trader friend of mine has an uncanny knack of picking the major market turns by a matter of weeks, but nobody will be able to pinpoint the exact turning point when it arrives. Not even the T Boone Pickens’ or Warren Buffett’s of this world will know for sure when the worst is finally over.
2. Falling oil doesn’t mean recession
The 2008 plunge in oil was accompanied by one of the deepest recessions in living memory, but that doesn’t mean we are headed for economic trouble this time around.
In fact, my research indicates that lower oil is overall a net positive for the economy and Head of the Fed, Janet Yellen, thinks so too.
As well, whenever oil has had a down year, there has been only four instances in the last 53 years where stocks fell in the following year.
3. The drop is at least partly artificial
There is no doubt that the slowing Chinese economy and a resurgence of supply has contributed to the downward slide in oil prices. However, another big reason for the drop has to be regarded as artificial.
The reluctance of OPEC to cut production has helped push the market lower, at a time when the market was on its knees. But what we do know about artificial moves, is that they can be just as easily reversed.
4. Everyone is looking for the bottom
Even those who are bearish on the long-term prospects of oil are looking for a bottom at these levels, since the market has simply come so far down in such a short time.
Remember that this is a commodity that has brought about immense political turmoil and conflict down the years. To think that demand for oil has dropped so substantially in such time has to be considered absurd.
5. There will be a short squeeze and it will be fierce
Make no doubt about it, there are a lot of speculators and momentum traders who are short oil right now and when the first sign of a bounce comes, there will be an awful lot of traders trying to get out at the bottom.
That will result in a fierce short covering rally that could well look similar to 2008.
JB Marwood is an independent trader, writer, and stock market enthusiast. For more trading tips and strategies, check out his blog at: decodingmarkets.com.