Saturday 31 October 2009
After having a classic breakout, described here back on the 19th, Crude Oil –
Picture Perfect Breakout , Crude Oil is undergoing a correction. It is now at an
important support area. The cogent question is, will price hold at what is often
a great buying opportunity on a restest of a breakout? The most reliable factor
we know about the future is that it remains unknown, not as obvious a statement
as it may seem. In the business of futures trading, it is all about the future.
The point is that where so many are trying to “predict” the unknown, one only
need look to the past to determine the probable direction of the future.
In this business, ANYTHING CAN HAPPEN! Emphasized as a reminder that
regardless of how one may be convinced that a particular event may unfold in a
certain way, it is not always necessarily true. The odds favor high probability
outcomes, and that is how one prepares to participate in the markets, based
upon outcomes determined by the activity of the past. Hence, the current
retracement in Dec Crude Oil may be presenting a high proability buy set-up
because it is now back at the original breakout area.
The horizontal line drawn across the August high is where price last met
important resistance and proceded to go lower. That price area will act as
resistance until it is exceeded, and then it will act as support. The dotted
portion of the horizontal line represents that it was projected into the future,
and on 15 October, it was broken on a wide range rally bar with a high-end
close on increased volume, all the requisite signs of a strong demand-driven
breakout. It is the point where buyers took control from the sellers by driving
price higher, almost with impunity.
[As an aside, for any doubters about lines projected in the future, versus being
drawn in to “fit the picture,” cover up the right and side of the chart and watch
as market activity develops relative to the drawn horizontal line. These lines
are drawn for a very useful purpose.]
It is apparent how volume increased on the breakout, a key indication of a
valid move. Since, price has been trading in overlapping bars, especially in the
past five trading days. This is a sign of balance, or struggle between the forces
of supply [sellers] and demand [buyers]. The edge goes to buyers because
the trend is up, and that puts the onus of changing the trend on the sellers to
prove themselves.
A comparison of the volume for the week just past clearly shows a reduction in
activity on the pull-back. This suggests that sellers are not entering the market
in numbers as buyers did two weeks earlier on what led to the breakout rally.
Demand is greater, in effort, than supply. Economics 101.
How importqnt is the projected horizontal line from the August high, former
resistance which should now act as support? Why act as support? It is the
prlce where buyers took control, and if they intend on retaining that control,
they will defend that area. If that area is not defended, it will weaken the
technical structure of the market. Sellers will take note of that and become
emboldened. If sellers see that the breakout is being defended, they will not
be as aggressive in numbers. Buyers will also take note that the support area
is holding, and that will encourage them to be stronger in conviction and more
aggressive in buying activity. It is all a matter of logic in application of the past
to determine the probability, but not the certainty, of what may develop in the
future.
A support trendline has been drawn from the late September, early October
lows, and one can see how the two lines are converging. As in life, so in the
markets, there are no accidents. Convergences are a good thing for
confirmation puposes. The more the better.
We can see, three bars ago, price came back and retested the breakout area,
opened lower the next day, [second bar from the end], and then rallied and
closed strongly. Volume did increase, but not by much, and not as much as
previous rally days a few weeks earlier. The signs are always there, but they
often remain hidden in the light. It would seem that the second and third bars
were a legitmate retest of the breakout. In fact, we took a long position in
anticipation of one occurring.
The reason why “anything can happen” was put in all capital letters for
emphasis is to demonstrate that no matter how positive a set-up may look,
nothing is for certain. After recovering from the initial retest, three bars ago,
price erased the negative activity with the described strong close. However,
instead of extending the gains the next day, price did the opposite. It erased
all the gains from Thursday! Hence, the overlapping bars, evidence of a
struggle between buyers and sellers. [We ended up with a small profit on a
stop-out should price fail to rally. Another point: Always Use Stops!].
What next?
The question everyone wants to know, in any market at any time, not just
Crude Oil, in the instant. Well, the best thing to do is not get into the prediction
game, a potentally costly ego-driven urge, but intead wait. Unlike the top-hatted
rabbit in Alice In Wonderland, always rushing to get nowhere, and not wanting to
be late in the process, it is better to be a follower of existing and known present
tense market activity than to be a leader of the unpredictabl future that can ofter
lead to margin calls and losses.
This is the answer to what next: Be prepared for an alert to take a long position
in an up trending market when the opportunity presents itself. There will be
particular signs indicating the market is ready to resume its uptrend. The signs
may or may not be easy to read, but they will be there, and it is THOSE present
tense, developing market activity signs that will determine what action to take,
and when. It is not at all necessary to “predict” what may happen when the
market will TELL YOU what is going to happen. A big difference, wouldnt you agree?
The most important piece of market information is knowledge of the trend in
the time frame you are trading. It is also important to know the trend of the
next higher time frame for potential support and resistance areas. Because we
have defined the day trend as UP, one thing we will NOT be doing is trading
against the day trend, so NO short positions will be taken. That keeps the
focus on just one side of the market, looking for signs to get long, and
watching for warning signs not to get long. [KISS]
It ain’t always easy, but we can try and make it easier. We do not know where
specific support will become apparent, so we wait to see what the market says.
We know support could come in anywhere from current price levels, down to the
74.00 area, so there is plenty of room to be wrong by “predicting” a price support.
The market will be our guide…the most reliable source of information.
