3 Reasons to Buy the Dip in Front-Month Crude

Front-month crude is forming a golden cross

Managing Editor
Sep 3, 2021 at 2:49 PM
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    On Monday, Aug. 23, October-dated oil (the current front-month crude contract) snapped out of its longest losing streak since 2019. While the black gold managed to only make a brief resurrection of three-straight daily gains, the climb was welcome considering oil has been on a long-term fallout, spanning nearly three months. Looking ahead, now may be the time to buy into the commodity, with two notable bull signals now flashing, and the equity freshly broken out of a long-term trendline connecting lower highs.

    Earlier this past week, Schaeffer’s Senior Quantitative Analyst Rocky White published his Indicator of the Week, focusing on the reaction oil traders tend to have when speculators jump ship. And while oil has seen a setback over the past few months, as we discussed, longer term, the equity has actually managed to charge more than 50% higher year-over-year.

    White came to the conclusion, that, while large speculators tended to take profits after oil hit a 52-week high -- which it saw back in early July, when it touched a six-year peak of $76.98 -- short term returns were almost non-existent. However, longer term, looking around 12 months out, crude speculators saw an average return of 30.5%, with returns positive 75% of the time following the eight occurrences calculated since 1999. In other terms, oil may be the perfect pick for long-term investors right now.

    The second bull signal flashing for crude is a golden cross on its weekly chart. Per Miller Tabak’s Matt Maley as told to CNBC, the commodity has just experienced its third golden cross since early 2009, after which, it tended to rally between 20% and 50%. The possibility of a high-valuation stock correction is also on the uptrend, as bond yields inch higher alongside inflation pressure.

    As we mentioned, the front-month contract looks to have broken out of a long-term trendline which has connected the equity’s lower highs since mid-2013. While oil is certainly a hot, albeit volatile, commodity at the moment, these longer-term, flashing bull signals could be pointing toward a brighter future for the black gold.

    WeeklyOilwith50and200wma

    Subscribers to Schaeffer's Chart of the Week received this commentary on Sunday, August 29.

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