Saturday 21 November 2009
We are advocates of two primary factors in trading: 1. Knowledge of the trend,
and 2. Use of present tense market activity. The first one is easy to
understand, for it leads to the path of least resistance. The second makes
equal sense, but few seem to understand the implications. The market itself
is the most reliable source of what is going on, day by day, week by week,
whatever time frame one chooses. It provides the purest form of market
information, untainted by artificially imposed trading tools that failingly attempt
to define the market, at least in a consistent manner, for we must acknowledge
that even a stopped clock can be right, on occasion.
The weekly chart of Crude Oil is providing concrete information. The past four
weeks are showing a cluster of closes. This is a message that the market has
reached a level of equilibrium between the forces of supply and demand. What
can be expected is an eventual imbalance, where one force starts to take over
and dominate. We can use the information generated by the market to draw
some informed decisions from the pictorial facts.
Look at the character of the last four trading bars. Each one has a close on the
lower end of the bar. Why does that happen? Sellers are keeping buyers on
the defensive, so it would appear from the information provided. If sellers are
in control while the market is in a stage of balance, the tipping of the imbalance
may lead to lower prices.
It may appear that way, but many of us know that appearances can be
deceiving. We are of the mind that buyers will prevail, and that crude is about
to stage another rally. Here is our logic.
Four weeks of net selling seemingly puts sellers in control of price activity, and
we would agree, with reservations, and a few questions. What has been the
net result of four week’s of selling effort? How far has price declined during the four weeks shown?
Answer?
Self-evident. Very little progress. After all of that effort, and with no results to
show for it, maybe the sellers are not so strong and not so much in control?
Of the four weeks, last week was the highest volume, [think effort], and price
closed lowest for the period. If sellers are in control, where is the downside
follow-through?
The support channel line is still holding, but that is not as important as WHERE
all of this is occurring. We described Crude Oil when it broke out, in a previous article back on 19 October, a month ago, Crude Oil – Picture Perfect Breakout .
Note the horizontal line drawn across the August highs, prior to the breakout.
That was resistance. Once price rallies above it, previous resistance now acts
as support. Where has all this selling effort occurred? Again, self-evident:
right on an area of support!
Any time you see a trading range develop on top of a previous trading range,
it most often is a bullish statement. You can see why we are such strong
advocates of using present tense market information. The market is telling us
everything we need to know. It has distilled all the known information from
every imaginable source and conveniently put into a format that is easy to
read, not that reading it is always so easy.
Now we can put the facts gleaned from the weekly chart into a reasoned
consideration:
1. The trend is up, the line of least resistance.
2. Sellers have tried unsuccessfully to drive price lower for four consecutive
weeks.
3. The current trading range is occurring on top of a previous trading range
4. The trading range is also holding above an important breakout level.
That seems like some fairly cogent information. Let us proceed to the daily
chart for better timing and execution of what has been learned.
The previous August breakout high is shown by the horizontal line carried over
from the weekly chart. Cutting to the chase, the two most important days
appear to be the two lowest lows of the entire trading range. We can determine
a few more pieces of information from them. Both are smaller ranges, and that
tells us that at the weakest level of the trading range, sellers were unable to
extend price lower.
Why not?
There was buying coming in. Understand that smart buying comes from lower
levels, and that specific bar, six bars from the end, shows exactly that. Price
went under the previous three week’s trading range, and instead of more
selling coming in, price stopped and held. Where did it hold? Right on top
of the previous breakout trading range from August, a point of support. That
support line is obviously doing its job. From that small range, a rally ensued
but stopped four days later. This tells us that the market has not finished
retesting the lows, and another retest took place this past Friday. Results?
Another small range bar, smaller even than the last failed probe lower. Plus,
all of this activity is taking place on the right hand side of the trading range.
The further along the right hand side of any developing situation, the closer
it is to a resolve. This is why we believe the stage is set for another rally in
Crude Oil, from a read of market-generated information, aka the most
reliable source.
There are always two sides to any story, and it could be that Friday was just
a resting spell just prior to price decisively breaking support and going lower.
It is very much a possibility, but given our read of market behavior, the
probability is considerably lower than that of the opposite case just presented.
All that is needed now is confirmation that price will rally.
What might that confirmation be?
A rally.
We saw signs of it during the intra day activity Friday but opted not to take a
position until the direction ofanticipated price movement begins to move in
that direction. If we are correct in the analysis, price has some room to run.
We are ready and prepared. Exit stage left, sellers.
