The mainstream financial media has been filled with headlines about a new bull market for crude-oil prices. Just three weeks ago, the same news outlets screamed about the new bear market in the same commodity.
However, the media’s main interest is to stoke emotion—fear and greed—to attract eyeballs and advertising dollars. To make money consistently, traders must avoid getting caught up in this mindless sensationalism and focus on the underlying fundamental and technical pictures.
The media’s favorite definition of a bull market—a 20 percent rally from a short-term low—is meaningless. From our perspective, oil prices would need to rally above their June high of $51.67 per barrel to be in a bull market. Last week’s high of $48.75 per barrel fell well short of the mark.
WTI’s rally off its August low looks more like a countertrend bounce after a vicious selloff that started in early June. If crude-oil prices fail to make a new high on this rally, the action over the past three weeks will constitute little more than a failed bounce into resistance—a classic topping pattern.
Positioning in the WTI futures market supports this interpretation of the recent rally in oil prices. When oil hit its summertime low of less than $40 per barrel, hedge funds’ aggregate reported short positions in WTI futures reached a record of about 220 million barrels, eclipsing the January-February 2016 high of 201 million barrels.
This data, released every Friday by the Commodity Futures Trading Commission (CFTC), serves as a contrarian indicator.