Energy Blow-Off: A Fat Tail?

A reader just wrote in asking about my bearish signals for energy based on the Commitments of Traders reports. I wanted to address this in a blog post because I think it's an interesting question in light of the recent ramp-up in crude oil and energy stocks.

The reason for the signal is that large specs in crude oil have registered historically extreme bullish positions for weeks that in the past have been good times to be in cash this market. Similarly, the commercial traders in crude are also at historically extreme bearish positions that in the past have led to profitable short signals for oil-related stocks.

My system did make a correct call, however, for natural gas, which has been getting chopped to pieces for two months. My best COTs setup for this sector is to trade on the same side as the large specs, and they've been right in their current call, which is to stay in cash this market.

Of course, no setup is always right. Just check the "Trading Setups" link to see details on the wins/losses for each of my COTs-based setups. What could be happening in this market is we're in the "fat end of a tail" - a historic blow-off that is extending longer than previous such periods in the data.

Such periods often end in tears! But I can't count on that. I've just gotten to the point where my position in DUG UltraShort Oil & Gas ProShares has dropped to the largest past intraday drawdowns for my OIH and XEG setups. (See explanation at the "How It Works" link above.) So a couple of days ago, I set a stop at $41.41. (That's based on the June 20 low minus the largest Average True Range value on the 15-minute chart.)

Who knows? Maybe that was the low, and it's all tears for the energy bulls from here on - instead of me!