Oil

If you are long the oil trade I recommended late last year then congratulations!  This was really an easy call to make based on cycles, sentiment readings, seasonals and the belief that the dollar is headed much lower.  The collapse in the dollar is one of the reasons I am neutral to mildly bullish grains right now.  In the end, I am thinking we will see a lot of inflation in the coming years which should be beneficial to agriculture.

I am 95% sure at this point that the 3 year cycle low in commodities and oil was reached a couple months early on Christmas Eve.  Since then, crude oil has rallied 23.9% in just 11 days.

At the previous 3 year cycle low back in 2016, oil rallied 33.5% in the first 11 days exceeding the present rally by quite a bit.  If you recall, the previous 3 year cycle low (2016) was particularly brutal.  It had been years since I had seen farmers so pessimistic.  ​The pink line represents the length of the initial thrust off the low in oils first daily cycle.  In 26 days, oil rallied 63.11% off the lows, taking it straight to the 200 day moving average.  That is incredible.

The rally this time could very well also take us to the 200 day moving average.  We don't know yet how many days that will be, but if it gets there in 26 days a conservative guess of a 45% gain to around $62 would be what I would say.  As crazy as that sounds, it is completely doable.  The strongest rallies you will get in any market is the initial thrust out of multi year cycle lows as proven in 2016.  The horrible sentiment farmers were feeling due to low grain prices was felt across all commodities then.  Every great rally in any asset begins with extreme bearish sentiment.

Don't forget, we also get a boost in our confidence from seasonal readings.  Crude oil and Gasoline both show gains when purchased mid January 14 out of the last 15 years.  

I am being asked if now is too late to get on the oil trade.  I think I have made my position pretty clear that this rally has probably 2 more weeks to go before we reach the first cycle peak.  In between, there could be a pretty scary correction.  The best way to sleep at night if you are wanting to trade is to get into the trade early which is how cycles help me because it makes the management of the position easier and keeps losses smaller.  Mid way through a move, it becomes a lot harder to manage the risk and the emotions.  I would recommend participating in this trade one of two ways.  One would be by taking a long futures position if we get a pullback which cycle traders refer to as a half cycle low.  You wait for a swing low to form, then enter the position.  The second way would be by buying an option.  I think oil will rally over the next 4-5 months, so an option with time could be very profitable.