Crude bulls are having a remarkable run this month despite a seemingly endless stream of poor US economic data, credit tightening in China and increasing European sovereign debt concerns. The near month crude futures contract is up almost 10 %. What are the bulls looking at that the bears do not see?
Using the word bull or bear with large energy futures traders is a bit of a misnomer as hedge funds and some ETFs regularly shift from bulls to bears and bears to bulls generally on monthly or bi-monthly time frames. The reason for this is their favorite technical indicator, Bollinger Bands. Bollinger bands graphically indicate standard deviation from the price mean. Computer trading programs are written to take advantage of crude's propensity to stay within 2% deviation of the mean.
Large traders jumped all over crude April 2010 futures at February's low of $69 when small sized traders were still selling hoping crude would keep sinking. What gave the hedge funds confidence to buy? The $69 figure happened to be the low end of the weekly Bollinger Band chart. Of course they could have been wrong and some unforeseen event could have triggered more selling. However trading is all about probabilities. The rareness of an outlying event occurring was more than offset by the high probability of crude prices returning back to its mean.
Crude April futures are now sitting just under $80. The weekly upper Bollinger Band limit is $84.7. It will be interesting to watch the bears trying to defend their short positions at the $80-$81 levels. They will need a lot of help from a much stronger US $, evidence of much weaker crude demand and a widening of outer month crude futures spreads. Without these events occurring the hedge funds will once again be able to congratulate themselves on ignoring the fundamentals and relying on their trading programs.
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