Oil has dropped by nearly 50% since July of last year.
This has made the price of many oil stocks very cheap to buy.
According to reports, many investors are racing to buy oil stocks while they are still cheap. These speculators are betting that oil has bottomed and that the price of oil will soon rise.
However, as I will show you, these investors are making a big mistake right now…
Let me explain.
There are 5 big reasons why oil has likely not bottomed, and why we could see both oil and oil stock prices fall further:
1) Oil supply and production has not fallen:
Even though we have seen a dramatic fall in the price of oil, oil supply and production however has not fallen significantly.
Take a look at this chart:
As you will see from the green line on the chart, oil supply and production has not been falling, despite the drop in oil prices.
So the problem that oil investors have right now is too much supply. We need to see supply drying up before we start seeing any signs of a “bottom” in oil and oil stocks.
2) Oil Equipment companies have cut their costs: oil companies which provide tools and equipment to oil drilling companies have cut the costs of their products. This has made it cheaper and easier for oil drilling companies to buy these tools. This has made it easier to drill for oil, and thus oil production has not fallen.
3) The pulse momentum is still negative: One interesting signal I am watching on the chart of crude oil is the monthly pulse signal. Take a look at this chart:
The pulse signal on the monthly chart shows the strength of the downward momentum on oil. So what does it mean?
You will see that the monthly pulse started 5 months ago. The average pulse signal lasts about 8 to 10 bars. This means that we could still have a further 3 to 5 months of downward momentum on oil.
So for the moment, any rallies back to resistance – such as $58.80 to $60 – are shorting opportunities.
4) Bearish wave count: You will notice from the above chart that the elliott wave count is bearish. This indicates potential further weakness in oil for 2015.
5) Extremely bullish sentiment: The latest reports show that oil investors are very bullish on oil stocks. That is a problem and here’s why:
Stocks and commodities do NOT bottom when everyone expects them to rise. It is the opposite: markets only bottom when almost everyone has given up.
And it seems we are nowhere close to being there yet.
Hope it helps and good investing!
Alessio Rastani is a stock market trader at www.leadingtrader.com