During the last few weeks, oil has dropped from over $93 a barrel to under $85.50 a barrel. When the demonstrations in Egypt first started oil spiked. When it looked as though there wouldn't be any interruptions in oil being transported through the Suez Canal, oil proceeded to fall.
Despite the 8 percent dip in oil prices, the sentiment toward oil has grown even more bullish. Large speculators are now long approximately 240,000 contracts according to the most recent Commitment of Traders report. This is the largest long position by the large speculators in the last five years.
Based on the chart and the extreme bullish sentiment, it looks as though oil still has room to the downside.
During the last year and a half, oil has been trading in an upwardly sloped trend channel. It has just pulled back off the upper rail and looks to be headed to the lower rail which is resting around $77 right now.
If we see oil pullback to the lower rail, this would accomplish two things.
First, the bullish sentiment would likely drop to a much more reasonable level.
Secondly, the overbought/oversold levels for oil would likely be in oversold territory at that point. This could set up another bullish move right as we enter the summer months here in the U.S.
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