Crude oil have we topped – the united states oil etf, lp (nysearca uso) seeking alpha f gas regulations r22

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Despite the price of crude oil ( USO) price trending higher with minimal deviation and bullish sentiment being nowhere near extreme levels, naysayers have been lined up to bet against the commodity for weeks now. Their instrument of choice has been the VelocityShares 3x Inverse Crude Oil ETF ( DWT), as well as the Direxion Daily S&P Oil/Gas Exploration Inverse 3x ETF ( DRIP). Both ETFs are down roughly 50% over this period, with barely any reprieve from the selling pressure. Meanwhile, oil has been trending higher above its key moving averages for weeks, consistently making higher highs and higher lows. The commodity is now up 21% for the year and is the third strongest performer among all futures markets year-to-date. During this run, bullish sentiment has not been over-heated in the slightest and has been hovering at an average reading of 72% since late March. The commodity remains in an uptrend, remains bullish across all time-frames and is only now starting to see elevated optimism from a sentiment standpoint. This backdrop suggests that oil could still head higher short-term without running into trouble from a strict sentiment perspective.

As can be seen from the chart below of crude oil with zero indicators, we’ve clearly been in a bull market. The below time-frames all show crude oil moving up from left to right across all of the charts which is the easiest way to spot a bull market. Trying to short a bull market is like trying to pick up pennies in front of a steamroller, the risk is not worth the reward.

One of the first lessons I learned in trading was that there’s little sense in trying to bet against the dominant trend. The majority of the best technical traders in the world readily admit they cannot do it consistently and it only weighed on their overall returns when they tried. This is why I struggle to understand why even seasoned professionals are obsessed with doing it. One of the times when this bet has a better chance of working is when sentiment is through the roof; however, that hasn’t been the case the past two months (shown below).

Before going off on too much of a tangent, I’ll circle back to crude oil and the current picture for sentiment on the commodity. Bullish sentiment ended the day at 83% bulls, above a sentiment moving average of 77% bulls. We are finally nearing the overheated sentiment levels that contributed to the early February pullback, but not quite there yet. The overheated reading is displayed in the chart below by the box I’ve drawn into the chart from mid-January. As we can see from this chart, price did continue to rally higher from these levels, and this is because sentiment is a leading indicator. This means that sentiment often warns of a top or bottom in an asset class before it develops, a reason why I find it to be such a valuable indicator. The key is knowing the temperature of the market you’re in as well as the direction of the trend to make the most informed decisions. My goal has never been to catch tops or bottoms and extract every last penny from a move, and for this reason, I consider sentiment to be an asset to my trading style. When things are getting too hot, I’m at my lowest exposure, and conversely, when things are getting too pessimistic, I get most interested.

Based on the current look of sentiment on crude oil, we’re not Africa hot, but we are Florida Keys hot. A move higher in oil without any pullback beforehand would likely place crude oil in a position where further gains would be unsustainable, and likely retraced. This would probably require a move to $75.00 oil or higher without seeing a pullback to $70.00 beforehand. This does not mean that oil cannot rally past $75.00 if this setup occurs, but it does suggest that any further progress would likely be on borrowed time.

Taking a look at the daily chart of crude oil below, we can see the bulls are in complete control. Even if we were to get a sentiment sell signal show up due to oil powering higher without any pullbacks, this would most likely just set up a consolidation or new base having to be formed within this longer-term uptrend. As can be seen from the monthly chart below, we broke out of a nearly two-year base earlier this year, and price is moving higher above a rising 20-month moving average. This tells me that the monthly chart is in bullish alignment and this is a bull market until proven otherwise.

Moving to a daily chart of United States Crude Oil Fund ( USO) below, we can see it is trending higher above its hands and has been riding them for months. The most recent sentiment sell signal in mid-January led to a sharp retracement, but all this did was set up a continuation pattern for the commodity to move higher eventually. This is why I rarely short during sentiment sell signals when a market is bullish across the majority of time-frames, but instead step aside and avoid entering new long positions until the coast is clear again. The key level for the bulls to defend going forward is $13.95 as a break below this level would move the shorter term time-frames from bullish into neutral alignment and may signal the start of a pullback.

In terms of the bigger picture, all the bulls have to do for now is defend $12.80 on USO. I would consider any corrections that cannot break the $12.80 level to be noise within a longer term uptrend, and I would look for setups to go long either oil or oil-related names once sentiment unwinds itself.

Bullish sentiment on crude oil is finally near levels where it runs into some issues, but is not there just yet. If the commodity were to continue higher to $75.00+ without first pulling back below the $70.00 level, I would consider any progress from that level to be on borrowed time, and the odds suggest they would be unsustainable short-term. This does not mean to jump in short with both feet, but I would not be looking to enter new longs above that level. I remain long a couple oil stocks with one being Wildhorse Resource Development (NYSE: WRD) and continue to run a wide stop on the position near the $22.00 level so that any pullbacks within the long-term trend do not shake me out.

We are not yet at levels where the oil bulls need to be worried, but we’re certainly heading in that territory if this run continues. The best thing for oil here would be a pullback to take some of the bulls out of the picture. Bullish sentiment is starting to near levels where the commodity has had trouble in the past, and if it powers higher here without a rest, we may end up with too many bulls as we did in mid-January. This setup would not be the end of the world for the medium-term and long-term picture, but it’s not a time I want to be entering new longs either. What’s important is what happens next in oil for this reason. A pullback and then a charge higher would most likely reset the current sentiment picture, a rally over $75.00 without a pullback preceding it would likely lead to a poor risk/reward ratio for the bulls short-term.

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