Given the speed of the move and the relative difficulty of executing this position, it is unlikely that many participants actually unwound the trade as it went against them (indeed, financial sector short interest has increased as that sector has rallied), but instead could have tried to hedge against the decline. While there are many different ways to hedge, one of the easiest would be shorting WTI futures. This scenario takes on greater plausibility given the relatively tight inverse correlation between financials (using the XLF SPDR as a proxy) and WTI from their July 15 extremes (Figure 2).
As such, a turn higher in this ratio could lead to an unwind of the short crude oil hedges, taking WTI higher in the process, although it is very difficult to quantify the magnitude of the move. Of the two legs to this spread trade, watch the financials. Key support for the XLF is seen at 19.75. A close through here would complete a Double Top, confirming a near-term high and warning of a resumption of the larger bear trend. If our scenario is correct, this should have bullish implications for crude oil (as well as bearish implications for equities in general).
