Crude Oil; Overbought in a Bear Market and What it Means

Keying off the USO ETF daily chart, below, as a rough poxy for crude oil we can see that black gold is now pushing its upper Bollinger Band after a multi-week rally. This circumstance typically means that oil is now short-term overbought.

When combined with the fact that the longer-term moving averages (yellow and red lines, well above price, the 200-day and 150-day moving averages, respectively) are clearly down-sloping and have been for quite some type, it gives the presumption of an ongoing bear market. 

And when price because overbought in a bear market it is usually a high probably short setup, as bear market rallies are exuberant, ferocious, spirited, but short-lived and roll back over with no mercy. Even if you do not think crude makes new lows, a rollover back to retest recent lows or even to make a higher low would be quite painful for newfound momentum longs. 

Of course, the counter to these points is if crude has already bottomed and it will now squeeze shorts higher for quite some time before any type of pullback ensues, as bear market bottoms are notorious for doing (think March-May 2009 in equites). 

So, if you think this is the first leg higher in a new crude bull market, the almost by definition crude should ignore its overbought condition now and continue on higher. 

In these situations, with potential valid arguments for both sides, the most fruitful trades are often found when traders are willing to reverse themselves, meaning taking a shot at a short here with crude, but if it fails then to reverse long and play for this rally to be the first leg up in a new bull.

For my taste, crude basing above its 50-day moving average and then pushing higher yet would be a better long setup. As for the short case, simply put bear market rallies which fail are notorious for collapsing fast and furiously, not making it easy for shorts to enter. Put another way, if this is a bear market rally destined to fail and head lower, we will all know it fairly soon.