Oil, Interesting Long Trade Opportunity

Oil has been battered throughout the last year, falling more than 50%. Even after its big decline,
it has failed to have a meaningful rally. One mark of an asset with poor fundamentals is the
inability to rally out of oversold states.
In contrast, other assets like the stock market, pushed to and remain near all time highs. This
contrast also reveals that oils fall is due more to supply reasons rather than demand. Demand
can come back quickly with stimulus or economic improvement. Supply takes longer to be cut.
Companies have debt and fixed costs. Further some decision makers have put their careers on
the line by borrowing millions of dollars to start these projects.
Therefore, supply doesnt immediately decline in response to lower prices. In fact, the first
instinct for producers is to increase production in order to make up for the fall in revenue.
Additionally while these projects have massive fixed expenses, the marginal costs are actually
quite low. So many have maintained production even at current prices.

Oil supply is filling up at a rapid rate, as many are selling futures contracts at higher prices and
storing oil. This is another long term depressant of oil prices. However, it is also true that assets
with poor fundamentals in bear markets can also have spectacular rallies. The poor conditions
lead to a high number of shorts as well as compelling valuations. Bounces can be potent as
value conscious contrarian buyers step in, squeezing shorts.
With proper timing, these can be lucrative trades in short periods of time. The key is to always
remember that this is a counter trend trade. Oils trend is down on nearly every timeframe and it
has poor fundamentals. This means stops need to be respected and kept tight. This is not the
right setup for a trader lacking in discipline.
The current setup has a natural stop loss point:

The low made last week of $42.41 needs to be respected. Violation of this should exit longs on
the trade. Interestingly, this level formed a double bottom with late Januarys low. The slight
undercut and then strong rally is common pattern at inflection points. Of course, it does not
necessarily lead to an inflection point.
There is also a positive divergence in momentum to accompany the lower low, this is another
coincidental sign that appears at market bottoms.

This divergence is not a reason to expect oil will go up, but it is a reason to take a chance (with
a tight stop) that oil will go up. A bounce out of such conditions will generate a powerful rally,
while the cost of being wrong is limited. If the bounce thesis and diagnosis of a market skewed
towards bears and shorts is correct, then a bounce should be immediate and violent.

A reversion to the mean of sentiment and short issues should generate a powerful rally in oil,
retracing some of its losses. Given the poor fundamentals of the sector this rally may set up as
a powerful short opportunity. However until these extremes are resolved through price or time,
it is better for shorts to remain patient.